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Persimmon earnings suggest UK house builders can’t outrun inflation much longer

08:47, 18 August 2022

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Persimmon housing development in Wales. Photo:Shutterstock
UK housebuilders look set for a tough 2023. Photo:Shutterstock

UK house builders look set for a tough end to 2022 and a challenging 2023. The latest ONS House Price Index reveals that the runaway housing market is finally showing strong signs of a slowdown, and recent results from Persimmon (PSN) appear to underline this.

So far, strong growth in house prices has insulated house builders from the effects of inflation and rising building material costs. But this ‘safe’ space for house builders appears to be under threat now.  

As Myron Jobson, analyst at Interactive Investor, explains the runaway housing market has finally started to show strong signs of a slowdown, with average house prices up 7.8% over the year to June 2022, down from 12.8% in May.

“While house prices have maintained a surprising degree of momentum, the distortions of the stamp duty holiday have created a misleading image of the housing market. Mounting pressure on budgets from ballooning inflation and big rises in new mortgage rates appear to be applying the brakes to the market,” he says.

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Persimmon (PSN) share price chart

Fall in house buyer demand

Recent data from the Royal Institution of Chartered Surveyors reveals new buyer enquiries fell for the third month in a row in July, representing the longest stretch of falling buyer demand since the start of the pandemic - suggesting that demand for homes isn’t as strong as affordability pressures mount.

"Skyrocketing house prices are likely to feel the pull of gravity from the escalating cost of living crunch come autumn, with the impending rise to the energy price cap set to further fuel inflation and the spectre of higher interest rates to combat rising prices upping borrowing costs” Jobson says.

Persimmon results

UK house builder Persimmon (PSN) is the latest to provide a trading update. While it showed an increase in the new home average selling price for the first half of 2022 (compared to H1 2021), home completions were down and total group revenues and pre-tax profits were also down on first-half 2021 numbers.   

Danny Hewson at AJ Bell believes Persimmon and house builders in general are facing tough times ahead.

“Rising house prices may be continuing to insulate Persimmon’s margins from rising costs but shortages of skilled labour and materials are putting pressure on volumes,” she says.

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She adds: “The sector is often keen to point to under-resourced planning departments as a constraint on growth and extra red tape associated with river pollution appears to be playing a part too.”

Although Persimmon is confident of a recovery in volumes in the second half, Hewson says it is easy to understand why the market is being cautious.

Margins under pressure

“For some time, Persimmon, and other house builders, have been running very fast to escape pressure on their margins. Cranking back into gear rapidly in the wake of the pandemic, they have been enjoying the benefit of a consistently buoyant property market.

“Now it looks like they could be overtaken by inflationary pressures amid the first signs mounting mortgage costs and cost-of-living pressures are finally having some impact on house prices.”

The appetite for change prompted by the pandemic – including gaining more indoor and outdoor space and potentially some accommodation for home working – has been a powerful driver for people to buy a new home.

However, as Hewson points out, there is a limit, and as the pressure on people’s finances grows it is going to become increasingly difficult for them to afford to move house.

City watchers are still seeing value in house builders – taking the view that much of the bad news on the horizon is already priced in and the demand for new homes (in the longer term) is not going to go away.

Marketbeat currently has a consensus rating of ‘hold’ on Persimmon, while Bellway (BWY) and Barratt Developments (BDEV) are both rated a ‘moderate buy’.

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