Brian BollenThe fundamentals of the UK housing market mean that the pressure on the new-build sector to meet the rising demand for homes has never been greater. This is the view of property specialist Knight Frank in its Housebuilding Report 2017, published in June.
This is just one reason why housebuilding has risen so rapidly up the political agenda in recent years. The key argument is clear, adds Knight Frank. The population is rising at a pace to create around 200,000-250,000 new households in England every year.
Net new housing supply in England averaged 160,000 over the last 15 years. It hit a low of around 130,000 in 2012/13. This shows why more homes are needed. However, two-thirds of suppliers do not think delivery can be kep above 200,000 in the current policy environment.
Liberum says economists more optimistic
Liberum paints a brisk picture of the sector in its most recent market overview. Economists are now more optimistic on 2017 and expect only a mild slowdown in 2018/19, write Charlie Campbell and Thomas Buisson in the most recent sector review published in April this year.
The rate of unemployment is now expected to rise to only 5.3% in 2018. We expect house price of inflation of +3% in 2017 and +1% in 2018, compared to -2.5% and +2.0% previously as the expected slowing of the economy bites, but not as hard as we originally expected.
The macroeconomic environment remains uncertain. Affordability looks stretched to us, and more importantly, to the regulator. Help to Buy faces key tests in 2018, but will likely come through unscathed.
Interest rise impact on sentiment
Interest rate rises are more likely to impact sentiment than the housing market, they continue. Build cost inflation is likely to persist and the land market may become more competitive. UK-listed housebuilders build homes speculatively for sale.
They use mostly sub-contract labour on land they have bought and put through planning. Some also buy options over land. This allows them to pay a discount in return for work done in bringing the land through the system. Planning represents a significant barrier to entry.
This ensures high returns across the sector. Barratt Homes reported record sales of £3.2bn in 2016 and total completions at their highest level since 2008. Earnings are much more sensitive to house prices than housing volumes.
Courtesy of Barratt Homes
Did you know?
Patrick Allen became the face of Barratt's and housebuilding in the 1970s. He was the front man in a series of iconic ads swooping down on developments in a helicopter bearing the Barratt name and oak tree logo.
He told of a breakthrough by Barratt's in the sector, represented by the sale of houses from £8,000 right up to £50,000. “You can choose a house for as little as £14 a week,” he shouted from inside the helicopter. “With a mortgage up to 95%.
Allen also voiced the UK government's Protect and Survive series of instructional videos in the 1970s. Some of the lines from that project were sampled into the single Two Tribes by Frankie Goes to Hollywood. He was also the uncredited narrator in Carry On Up The Khyber.
Liberum highlights a number of positive themes
- Government support is very helpful
- Land market remains very benign
- Builders are more disciplined than ever
- Dividends are generous and generally sustainable
What affects the property market sector’s share prices?
It's the economy. Interest rates: lower rates good, higher rates bad. Mortgage availability: without finance people can't buy a property. The supply and cost of labour and materials will both affect profits and therefore share prices.
Supply and demand for property. When demand for housing chronically outstrips demand, the strain will show in one figure: the price of the housing in question. The appointment of credible senior staff is another issue.
A slowing economy with supportive credit conditions, and a stable property supply could lead to growth in average UK house prices of 2-3% over the next 12 months, say UBS Wealth Management strategist Caroline Simmons and her colleague analyst Christof Koumoudos.
Political uncertainty weighs on confidence
In their 22 June market briefing, they say this compares with 4% growth over the past 12 months. They say the recent increase in political uncertainty may weigh slightly more on consumer confidence and act as a drag on transactions in the near term.
But medium-term structural demand remains supportive. They expect new housing supply growth to remain in low-singledigits as demand slows in the near term. Overall, London prices have risen 2% in the past year, but prime central London prices have fallen 7%.
More expensive boroughs have seen double-digit price declines. “The direction from here will be determined by the economic backdrop and international interest, particularly in light of Brexit and UK migration targets,” they add.
More Liberum positives
- Housing is in short supply
- Rate environment is very helpful
- Balance sheets are strong
What can make one company buck the trend?
In terms of business, defining characteristics like quality and reliability. The David Wilson and Charles Church brands are widely respected for their commitment to quality. In terms of share price, suggestions of an acquisition can boost the target price.
The buyer's share price, though, will often fall on the same news.
