Analysts at Capital Economics highlight how the gap has narrowed between the capital and the strongest performing region, the East Midlands. The differential, at 5.7 percentage points, is down from 10 points a year before, which for Capital Economics suggests that ”regional price inflation is converging on a low, single-digit rate”. For London, the resilience of the job market runs counter to a view that we are seeing the start of a longer fall-away in sale values.
It will be interesting to see how that analysis dates, and far be it for me to call the fortunes of the housing market. For IC readers, the question will be how well set up the listed housebuilders are for any sustained price correction. Given the attention on the Help-to-Buy policy and how it has supported profitability in the sector, you’d think share prices would have been on an absolute tear over the past couple of years.
But the sell-off following last year’s EU referendum made quite a dent: Barratt Developments (BDEV), the third-largest of the listed builders, has seen its shares decline 3.6 per cent over the past 24 months, while the second-largest builder, Taylor Wimpey (TW.), has registered just a 1.2 per cent gain. Still, the average share price rise over that period from the top 10 builders by market capitalisation has been a rather more robust 17.6 per cent.
Shareholders would be wise to consider the downside. According to S&P Capital IQ data, those same 10 companies have a market value that is, on average, twice their book value. In an environment of falling prices and rising rates, that premium to net assets could well come under some pressure.
Yet the profitability of land selection, purchasing and building mix has been of foremost concern for investors in the sector, and thus bosses, for some time now. The five biggest housebuilders listed in London have an average operating margin of 22.9 per cent over the past 12 months. That compares with 21.4 per cent three years ago, and 20.6 per cent five years ago. Land banks are also fairly healthy – an average of 5.2 years, according to analysts at Peel Hunt, as compared with 3.5 years of land two decades ago.
So it looks as though builders have a bit of a buffer. “With house prices rising enough to offset the build cost pressures, the outlook for margins remains healthy,” argues the broker in its latest review of the sector. Peel Hunt forecasts house prices to grow at 2 per cent a year for the next few years. This modest growth expectation matches that of Capital Economics. There was further government support for the housing market last weekend when Theresa May indicated another £10bn of funding for the Help-to-Buy scheme, which some analysts suggest could be enough to see Help to Buy run through most of the next decade.
Sticking with operating margins for a moment, the second highest of a London-listed company that is not in the capital markets or investment trust buckets belongs to another company with skin in this particular game. That’s property portal Rightmove, at 73 per cent. That margin has been consistently high in the past few years: proving that whether we are buying or selling, we can’t help looking.
Ian Smith is companies editor
