Significant headwinds for housebuilders

Housebuilders are a lot leaner and fitter than they were at the start of the year, with capacity trimmed and balance sheets beefed up by a string of rights issues. Some have been more successful than others, notably Persimmon and Berkeley Group, by concentrating on less affected areas such as the southeast, or by switching output more towards family homes and away from flats.

But the outlook for the coming year is bleak. There is already evidence of falling demand, and the reasons behind the fall off in potential buyers are likely to become more acute before they get any better. The biggest problem at the moment is the scarcity of affordable mortgages. True, interest rates are at all-time lows, but banks have cut right back on 100 per cent loans, with most not willing to go beyond 75 per cent loan-to-value. This means that new home buyers have to accumulate a substantial deposit. And the situation is unlikely to improve, because banks will have to replace more short-term funding in 2011 than they did in 2010. On top of this, the clock is ticking away on the Basel III reserve requirements that will force banks to raise their capital reserves.

Then there is the employment situation. More redundancies are coming as the government's spending squeeze starts to bite. And for those still employed, many are faced with a freeze on wages or even a pay cut. Meanwhile, VAT has been increased and child allowances cut back. Moreover, the already cumbersome planning process has been thrown into more confusion by the 'localism' bill, which gives local authorities more greater control and strips away central government targets. Some fear this might lead to 'nimbyism' and greater use of conditions attached to planning consents.

Housebuilders are also faced with the prospect of a squeeze on margins as raw material costs rise while house prices stagnate. The only good news is that on valuation grounds, the housebuilders look cheap. That's mainly because the value of their landbanks is more than the market capitalisation, and it's undeniably good news in the long term as it leaves share prices with a lot of catching up to do when the good times return. However, the good times remain some way off, and housebuilders are likely to continue to underperform.

BERKELEY GROUP HDG.(THE)9431,23814.40.09.5
BOVIS HOMES GROUP42556642.10.0-4.3
TAYLOR WIMPEY331,0630.0-21.1

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