Persimmon PLC (LSE:PSN)’s warning today showed cracks are becoming firmly rooted in the UK housing market but why is the market so surprised?
The FTSE 100 listed builder said that sales and prices of new build homes have fallen while customers pulling out of deals have increased with the news sending shares down nearly 7%.
But as Russ Mould at AJ Bell said the warning “on the housing market feels like it has been in the post for months.”
Recent surveys from the Halifax and Nationwide have all pointed to falling prices and subdued demand as cost-of-living pressures, soaring mortgage rates, following the infamous mini-budget, and a deteriorating economic outlook have all taken their toll.
Dividends under threat
So what changed today and are the factors hitting Persimmon likely to be repeated when fellow housebuilders report numbers this week and beyond.
The market seems to think not. While Persimmon stock was marked down nearly 7% others fared better with Berkeley Group Holdings PLC (LSE:BKG) the next worst off, but only down 1.15%.
There are some company specific issues. The group made a £350mln provision relating to cladding safety work and was unable to provide guidance for 2023 given uncertain market conditions, always a red flag for the stock market.
But although a cut to the dividend is almost inevitable with pay-outs funded from cash reserves in recent years rather than free cash flow this is unlikely to be restricted to Persimmon.
“A double-digit dividend yield was the market ringing the alarm bell over the fate of the dividend and a hefty cut can’t be ruled out as Persimmon looks to cut its cloth to fit more straitened circumstances” Mould said.
Further cuts to dividends can be expected to be signalled in the coming weeks with no housebuilder likely to be immune from the gravitational pull of a falling housing market and an economy in decline, putting profits and reserves under pressure reducing cash available to pay-out to shareholders.
Mould said "it seems likely that investors will now start bracing themselves for lower payments from other housebuilders, especially as Vistry, Taylor Wimpey and Barratt Developments are all offering a double-digit dividend yield, according to current consensus forecasts."
Are we there yet?
The question then becomes how much of this is already priced into the market. Profits at Persimmon are already forecast to fall by 20% in 2023 and shares in housebuilders have fallen by 44% this year.
Much could depend on how Rishi Sunak and Jeremy Hunt restore confidence in the UK’s finances.
A lower than expected peak in interest rates would result in reduced mortgage rates than currently feared which might aid a housing market already supported by restricted supply while reduced inflationary pressures would bolster industry margins.
But greater visibility on this is required before investors may wish to dip their toes back into the market.
One possible catalyst is the prospect of further M&A activity following the lead of Vistry PLC which swooped for Countryside.
So whilst the news from housebuilders in the coming weeks will not be pretty, indeed for a while it may be grim, there will come a point when the poor news flow becomes not so bad as far as the market is concerned and the sea of red seen in 2022 turns green.
We may not be there yet but with companies in far stronger financial health than in 2008/09 perhaps the cracks we are seeing in the housing market will not rock the foundations of share prices in the housebuilding sector in 2023 as much as some suggest.