Housebuilders and their financiers talk of the 'invisible line' somewhere north of Watford where the construction of new housing becomes difficult to stack up. The biggest fear? The impact of austerity cuts on public sector jobs, with the spectre of unemployment looming large over future margins of regional housing developments. It seems entirely logical that this will depress demand and house prices, and the latest Land Registry statistics show the decline is setting in.
Another warning sign was evident in property analysts' treatment of Grainger's recent results. The landlord owns 13,000 rental properties across the length and breadth of the UK. When tenancies end, properties are sold off. However, one analyst is now factoring in a 15 per cent house price slump to his 2011 forecasts. The impact of such falls on the new-build market would be catastrophic. With housebuilders' margins so thin, the risk of developing stock that will simply sit on the market is too great. As a result, volumes are falling and analysts fear a fresh round of landbank writedowns.
But this is not the only problem. With no sign of the mortgage market easing, developing social housing has been a real boon in the downturn. True, it has been less profitable than private housing, with margins slipping a few notches. But it keeps cash flow churning and housebuilders have got surprisingly good at it (Bellway, for example, said 48 per cent of its annual sales were social homes at its full-year results this autumn. And Barratt recently reported £330m of forward sales of social housing, a 44 per cent increase year on year). But since the chancellor's spending review, the days of generous affordable housing subsidies are numbered. "In the past, you would receive a grant of £120,000 for a £200,000 house. That has disappeared," says Andrew Wiseman, chief executive of Aim-traded London housebuilder Telford Homes. "Economically, it doesn't work to produce affordable housing anymore."
Its absence could leave a hole in builders' balance sheets. For the next 18 months or so, they will be kept busy building schemes that have already secured grant funding. But, after that, the situation is unclear.
The end of government subsidised shared equity schemes (HomeBuy Direct) will also have an impact on sales levels. The unsustainable practice of lending first-time buyers their deposit has been much scrutinised in Investors Chronicle, and some estimate it is used as an incentive for around a quarter of private sales. Over £400m of government subsidy was pumped into such schemes in 2009-10. This will not be repeated, and builders’ balance sheets can only pick up so much of the tab.
Still, London remains the bright spot. With sales to foreign buyers at record levels, prices continue to rise. This is to the benefit of Berkeley Group. Its half-year results in December showed a 19 per cent rise in pre-tax profits, and the group is so confident that it predicts it will beat full-year profit forecasts. Foreign investors, particularly those from the far east, are the only people buying off-plan. The few UK buy-to-let investors interested in new-build typically buy completed units. So housebuilders have found success taking their London-centric schemes on the road, with exhibitions in Hong Kong, Kuala Lumpur and Singapore.
But how long can it continue? Builders were left in the lurch two years ago when mortgage finance dried up, and off-plan buyers from the UK and Ireland tried to walk away from purchases. Mass legal actions were planned by developers including Ballymore and Berkeley, but in the end most were negotiated away as Asian investors moved in. Larger deposits could prevent such a calamity occurring again. Telford is even offering to pay 6 per cent interest on deposit monies, although this is taken off against funds owed on completion, so buyers only get the discount if they pay up.
Whether their investments turn out to be shrewd remains to be seen. Huge demand and short supply of London schemes has pushed up prices. However, a recent RICS survey showed the drop in homes being built and rising numbers of renters is making landlords richer, with record numbers of estate agents reporting rising rents – great news for the few landlords able to access well-priced buy-to-let mortgages.
