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Back on the canvas

Created:
28 October 2008
Written by:
Algy Hall

Hopes for a recovery in the housebuilding sector have fizzled out since its late-summer rally. At the time of the rally we weren’t entirely convinced by the comfort the market took from Persimmon’s half-year results that suggested the market was stabilising (Stable but critical, 26 Aug) and the builder has now painted a far bleaker picture of prospects. Two months on from its results, the builder has told shareholders that they will have to stomach £600m-worth of provisions to cover falling land values on top of a £40m first-half write down.

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What has really hurt Persimmon since its results, and prompted the additional landbank-related hit, is the rate at which house prices continue to plummet. The group has now doubled its predictions on the amount house prices will fall in the second half of 2008 from 5 per cent to 10 per cent. This is bad news for the whole sector as the impact of house price falls have a magnified effect on land prices (Values built on sand, 20 May) which in turn are a key asset many banks look to when agreeing debt packages.

And despite the big house price falls to date, there could be much worse to come as we enter 2009. Indeed, Persimmon has seen the rate at which would-be house buyers are cancelling purchases surge to 35 per cent in recent weeks. What’s more, unemployment is rising fast which is one of the problems that was yet to materialise in earnest when the sector was rallying a few months ago. With this comes the prospect of repossessions and further falls in buyer confidence. And the hang-over from the buy-to-let boom threatens to be long and painful now a nasty recession is setting in.

However, there are some reasons to be positive that didn’t exist when Persimmon reported in August. For one thing a series of interest rate cuts now looks a given. In addition, share prices are at extreme levels following forced selling from financially-stretched investors, such as hedge funds. In fact, since we pooh-poohed the optimism taken from Persimmon’s results the sector has lost 35 per cent of its value. Shares in companies such as Taylor Wimpey simply look like a bet on survival. And given that from its July tough to September peak, the sector rallied 89 per cent, it is certainly tempting to consider housebuilders again now the sector is just 3 per cent off its July low. But finding grounds to put faith in a sustainable sector recovery remains some way off. And anyone betting on a bounce back needs to bear in mind that not all companies are likely to make it through this downturn and some could have very dilutative equity fund raisings. Handle with care.

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