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Stable but critical

Created:
26 August 2008
Written by:
Algy Hall

The market has responded with enthusiasm to suggestions from the UK's largest housebuilder, Persimmon, that sales volumes appear to have stabilised since April resulting in a fall in the industry's unsold stock. On the day of the comments, housebuilders' shares managed a weighted-average jump of 6.7 per cent leaving the sector 14.3 per cent ahead for the month. And the possibility that the market has stabilised was given further credence by figures from the British Bankers' Association (BBA) showing that the number of mortgages approved in July was marginally up on June.

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However, these tentative signs that the housing market could be finding something of a floor need to be taken in context. Mortgage approval numbers in July, while flat on the month, are two-thirds lower than a year ago. That suggests housebuilders will continue to face falling prices as well as extremely depressed, albeit stabilised, sales. And further price falls keep alive the threat of big land bank writedowns even if the stock of new homes is reined in.

And there's good reason to believe that any stabilisation at this juncture will only prove temporary. With UK economic growth having ground to a halt in the second quarter and large forecast rises in unemployment, the residential market could face forced selling, creating an increase in supply and a new leg in the housing downturn.

And there's the risk that this trend will be exacerbated by the fallout from the buy-to-let boom which provided so much of the demand for new-build homes in recent years. Indeed, the fears we recently expressed about residential rents (House rules, 16 July) seem to have come home to roost with reports of rental falls. That's hardly surprising given the rush of unsold homes coming onto the letting market, falling real incomes, rising living costs and ebbing economic migration from eastern Europe.

So, while housebuilders' share prices fell hard prior to the recent rally, now hardly looks like the time to jump aboard a recovery bandwagon. Despite signs of stabilisation, this may well be the end of the beginning rather than the beginning of the end of the sector's woes.

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