Neil DennisWhen buying a house we are often told that location is everything, and this is becoming a key factor in the profitability for those companies concerned with building and selling homes, too.
House price growth has been slowing in recent months according to several surveys, but now appears to be climbing out of a summer lull.
However, those housebuilders exposed to the worst hit areas, London and the south of England, still face headwinds in the months to come.
House price indexes
Halifax's house price survey, published on Thursday, is the latest and makes for more optimistic reading following several months of slowing growth.
According to Halifax house prices rose 1.1% month on month in August, easily beating a Reuters poll of analysts that forecast a 0.2% gain. Annual growth rose to 2.6% in the three months to August from 2.1% in July.
"Recent figures for mortgage approvals suggest some buoyancy may be returning, possibly on the back of strong recent employment growth, with the unemployment rate falling to a 42-year low," says Russell Galley, managing director of Halifax Community Bank.
Nationwide is among the house price surveyors to report ongoing softness in price growth - Source: ShutterstockBut the surveys don't all tally. Nationwide, the UK building society, compiles a similar survey to Halifax and found that house price growth slowed in August, with the annual rate of growth slipping to 2.1% from 2.9% in July.
Furthermore, Rightmove, the online estate agent reported a 0.9% monthly fall in August.
The one thing they all agreed on was that much of the weakness in the market was down to a dwindling supply of new housing and the squeeze on household budgets fostered by inflationary pressures and low wage growth.
Galley says: "Wage growth is still lagging increases in consumer prices, which is likely to add pressure on household finances and increase affordability challenges for some buyers."
And the areas where growth is slowing the most? The most expensive areas in London and the south of England.
Construction PMI
Meanwhile, growth in the construction industry itself is slowing. The latest purchasing manager survey of the sector showed the PMI construction index dipped to 51.1 in August, the weakest performance in a year and edging closer to falling through the 50 level that indicates growth.
The headline index tells a slightly skewed story, however. Much of the weakness in the data is from slowing rates of commercial construction. Residential building activity rose at an accelerating pace.
A development site by Barratt Homes: Barratt is among those reporting strong profit growth this week - Source: Wikimedia CommonsHousebuilder results
So, despite the headwinds, the housebuilders that have reported quarterly earnings every day this week have, on the whole, beaten or matched forecasts.
- Barratt Developments - full-year earnings up 12% to £765m in line with guidance. Gross margin hit the target 20% level
- Redrow - full-year earnings jump 26% to £315m, beating previous guidance. Operating margin rises to 19.4%
- Persimmon - first-half earnings climb 30% to £457.4m, beating City estimates, while sales rise 11.5% as volumes of completed homes rise 8%
- Taylor Wimpey - first-half earnings up 26% to £335m driven by volume growth of 9%. Margin rises to 20.2%
- Grafton - first-half profit up 16% to £75.4m. Overall group margin up to 5.8%
- Bovis Homes - bucks the trend with an expected 31% fall in pre-tax profit, but recovery plan met with approval
The past year has been a period of growing uncertainty for housebuilders. Possible Brexit outcomes cast shadows over the need for such ambitious building volume targets, while the growing squeeze on finances as wage growth remains muted raises affordability issues.
Yet there has been much to help the sector through this period.
Help to Buy
The government's Help to Buy scheme was rolled out in April 2013 and had quite an impact on the market.
By offering first-time buyers a loan for up to 20% of the property value for their contribution of a 5% deposit, the government helped contribute to higher house prices and higher profitability for housebuilders.
Take up of the scheme was immediate: during the first year a fifth of new homes built and sold were purchased with the help of the scheme.
"The Help to Buy programme has been significant in helping housebuilders outperform a slower existing home market," says Charlie Campbell, analyst at Liberium.
Surveys have found house price growth is falling more quickly in London than anywhere else - Source: PixabayLocation, location, location
So, what are the main takeaway points for investors in the housebuilders sector?
Surveys have found growth in London house prices is falling more quickly than anywhere else in the country.
Berkeley Group admitted in June that it was facing a number of headwinds in its key London market resulting from a number of factors including Brexit and the higher stamp duty on expensive homes. Barratt, meanwhile, conceded it saw no let up in the "London effect".
Indeed, it would appear those housebuilders with the greatest exposure to the London and south England property markets are looking the most vulnerable at the moment.
Figures from property agency JLL earlier this year showed the number of new housing starts in London has fallen by three quarters as housebuilders pull back due to falling prices.
Market reactions
The final words offer some caution on the sector, but also some optimism. Headwinds will remain given the political and economic uncertainties that are likely to persist for some months.
"We would expect the sector to be less attractive to investors as economic uncertainty has ramped up, and house buyers become more reticent," says Campbell at Liberium.
But profits in the sector have largely weathered the summer lull in house prices, and today's Halifax survey offers hope that the sticky patch is coming to an end.
Ken Odeluga at City Index says: "We expect uncertainty combined with glaring supply dynamics to continue to wrong foot the most pessimistic views and make any slowdown more glacial than expected."
Barratt shares are up 1.6% at 605p on Thursday, recovering some poise following Wednesday's 4.7% fall. Similarly, Persimmon has reclaimed 0.6% in the past two sessions after falling 2.5% on Tuesday.
Redrow's shares have settled flat at 631p on Thursday having fallen 2.5% in the previous two sessions, and Taylor Wimpey has followed the trend, reclaiming 0.7% in the past two days after falling 1.7% on Tuesday.
