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Housebuilders hail higher profits, but trouble may lie ahead

Profits have risen as consumer confidence returned after election

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Housing shortage may fuel price bubble

Housebuilders are hailing bumper profits as the market picked up after the UK’s general election, but experts warn that there could be trouble ahead.

Companies have reported an upturn in consumer confidence and mortgage availability as the uncertainty created by the poll in May lifted.

On Monday, Bovis Homes (LON:BVS) posted a record number of home deals and a 10% rise in average sale prices on private completions to £264,200 against a year ago. First half profits rose 9% to £53.8mln.

Late last month, Taylor Wimpey (LON:TW.) posted a 33% rise in half-year profits and said sale prices were rising.

And on Tuesday, another sector heavyweight, Persimmon (LON:PSN), is tipped to unveil a 21% rise in half-year pre-tax profits to £254,000. It posted a 4% rise in selling prices to £195,000 in a July trading update.

But economists caution against euphoria, pointing to structural imbalances in the market that could create a price bubble.

Earlier this month, figures from the Chartered Institute of Purchasing & Supply (CIPS) and economic data group Markit showed UK construction output growth slowed in July from June’s four-month high amid a weaker rise in housing activity.

The CIPS highlighted shortages of materials and skilled labour and long lead-in times for new projects as some of the constraints faced by companies.

Markit senior economist Tim Moore said: “July’s growth slowdown is the first for three months and perhaps is a sign the post-election impact on construction confidence has started to diminish.”

Housing shortage

Commentators also say a shortage of homes in the UK could prop up prices and keep first-time buyers out of the market.

Shore Capital said the industry had hoped the market would experience a balanced rise after the election, with the number of home sellers keeping pace with rising demand.

But the number of homes for sale has fallen short of demand since the poll, creating one of the widest gaps between buyers and sellers since at least the start of the financial crisis.

Shore analyst Robin Hardy said: “The lack of homes for sale is not just agents’ puff – the level of stock available to buy is at its lowest level for at least 15 years.

“Naturally with the sellers having the whip hand, there is likely to be upward pressure on pricing.”

Following their narrow election victory, the Conservatives pledged policies such as giving people the right to buy housing association properties.

But commentators say it may be unworkable because of the legal issues involved in forcing associations to sell homes to their occupiers.

The UK needs to build about 200,000 homes a year to keep up with demand – but the industry’s annual output has been well short of that, experts say.

Hardy said the government needed to do more to stimulate housing supply rather than just fuel demand with mortgage guarantee policies such as Help to Buy.

“Political policy remains solidly biased towards delivering demand-side stimulus with very little supply-side change,” he said.

“We see a risk that policy will have to change with demand stimulus wound down to cool the market.”

Great opportunity

Fulcrum Utility Services (LON:FCRM) , a company which installs gas and electricity connections to offices, factories and new housing estates, provided a different perspective.

Fulcrum already has a deal with Taylor Wimpey (LON:TW.) to link up new estates to the grid and is hoping to work with other house-builders.

Chief executive Martin Donnachie said: “We feel we’ve only just started in housing and there’s a great opportunity there.”

But Donnachie said there were few signs at present that the supply of homes would increase significantly.

He said: “The demand is there but supply isn’t so while that’s the case, there’s going to be pressure on prices.”

One of the biggest players in the industry, Redrow (LON:RDW), has also blamed planning red tape for the housing shortage.

Chief executive Steve Morgan told the Daily Express earlier this year: “Obtaining detailed planning approvals remains a slow and tedious process and is the single biggest obstacle to the industry increasing the volume of new homes that the country needs."

Quick facts: Taylor Wimpey

Price: 174.1 GBX

LSE:TW.
Market: LSE
Market Cap: £5.71 billion
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