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Don't bet your house on the housebuilders

Another profit warning from Crest Nicholson plus the previously buoyant East Anglia housing market joining London and the South-East in the doghouse is further evidence the sector has peaked

House made from bank notes
Help to Buy demonstrates the law of unintended consequences

Since the introduction of “help to buy”, making money from building houses has been as easy as shooting fish in a barrel.

Some companies are clearly better at it than others though, judging by today’s trading update from Crest Nicholson Holdings PLC (LON:CRST), where the chief financial officer, Robert Allen, is stepping down after the company warned that it expects full-year profits to drop due to weaker margins and sluggish sales.

The company said the housing market in London and the South of England has been “more difficult than previously anticipated” with flat prices and lower sales volumes in the second half.

"The usual Autumn pick up in sales volumes has not been evident during September and October, with many customers putting off decisions to buy whilst current political and economic uncertainties persist,” said executive chairman Stephen Stone.

10 out of 13 regions are still enjoying house price growth

The profit warning came on the same day that the UK house price index data revealed that average house prices in the UK increased by 3.2% in the year to August; admittedly this was lower than July’s growth of 3.4% but it is at the sort of level that should allow house-builders to make a decent profit while not pricing first-time buyers completely out of the market.

On the other hand, how well the house-builder does depends to an extent on the geographical area of focus.

According to the Office for National Statistics (ONS), over the past two years, there has been a slowdown in UK house price growth, driven mainly by a slowdown in the south and east of England.

This month the lowest annual growth rate was in London, where prices decreased by 0.2% over the year, after being flat year-on-year in July.

So, while London is a problem, the “ongoing sprightly growth in house prices” is, according to Joseph Daniels, founder of modular homes developer Project Etopia, “a blow for first-time buyers who were hoping Brexit uncertainty would have triggered a noticeable slowdown in the market by now”.

Meanwhile, Nicholas Finn, executive director of Garrington Property Finders, observed that while London and the South East remain the “villains of the piece” (except for those looking to buy a house in those areas), another former star market has joined them at the bottom of the regional league table: East Anglia.

“It too had previously enjoyed booming rates of price growth – with some hotspots seeing annual rates of inflation to match London’s – but the East has now caught the capital’s cold.

“Fragile confidence is forcing sellers across the East and Southeast to trim prices and keeping much of the market in a state of suspended animation.

“The mercurial rise – and slowdown – of what until recently was seen as the ‘Holy Trinity’ of England’s hottest three markets reveals not just the market’s reliance on confidence, but also how confidence has been dented,” Finn said.

“For now the greatest activity is concentrated in regions like the Midlands, which are better insulated from Brexit fears and where buyers can see stronger value.”

Broad-based players still doing OK

Barratt Developments, which has a decent nationwide spread, has been faring better than Crest Nicholson.

It has started the new financial year in a strong position as government schemes and low borrowing costs continue to support demand.

In a trading statement ahead of its annual general meeting, the company said forward sales, including joint ventures, came to 12,903 units at a value of £3.14bn on October 14, compared to 12,277 units at a value of £2.8bn a year ago.

Barratt continues to expect outlet numbers for the 2019 financial year to rise.

READ Barratt Developments starts new financial year in 'strong position' with forward sales ahead

Net private reservations per active outlet per average week stood at 0.72, down from 0.74 last year.

The company plans to increase housing volumes by 3-5% per year to help address the UK’s housing shortage.

Similarly, sector peer Bellway PLC (LON:BWY) is looking to increase the number of houses it builds, though it remains wary of a possible Brexit effect on consumer confidence.

The group said that while there is a risk to consumer confidence posed by the forthcoming exit from the EU, assuming that market conditions remain robust, it has a solid platform from which to further increase output in the year ahead.

In the first nine weeks of the new financial year, trading has remained solid, with the group achieving 176 reservations per week, up 2.9% from 171 reservations per week in the same period of 2017.

“Management has not given volume growth guidance for 2019, noting that uncertainties around Brexit may impact the key spring selling season in the calendar year 2019. London trading is said to remain robust at its price points (ASP [average selling price] £376k ex Nine Elms),” broker Liberum noted.

“Clearly Bellway still aims to expand its business even into a less favourable market climate,” broker Shore Capital noted.

“There are still new divisional offices being added to the network and the board has again highlighted the operational capacity of the business to be 13,000 units per annum (10,307 last year).

“Margins are likely to be tighter but we feel that Bellway is more willing than most to accept this and has been warning on the non-sustainability of current margins for at least the last two years,” Shore Capital added.

The top of the cycle is behind us

The consensus seems to be that the top of the cycle for the sector has passed – London-focused Berkeley Group PLC (LON:BKG) recently said its results for the year to the end of April 2018 represented a peak for the company and that profitability would return to more normal levels om 2018/19.

On the other hand, so long as the government remains intent on transferring funds straight from the pockets of tax-payers into the long-term incentive plans of the chief executives of housebuilding firms – sorry, I mean into a scheme designed to make it easier for first-time buyers to buy a home - the good times are likely to last for a while yet.

Persimmon PLC (LON:PSN), for instance, said earlier this year that the conditions in the housing market continue to be supported by strong employment levels, low interest rates and a competitive mortgage market.

Brexit may yet throw a spanner in the works and there is also the prospect of the chancellor of the exchequer bowling a googly in the forthcoming budget.

The current help-to-buy scheme has three years left to run, and every year that passes where the chancellor refuses to extend it would undermine confidence in the housing market and by association, house-builders.

A loss of confidence in the housing market would, of course, lead to house prices falling.

Now, that’s what I call help to buy.

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