Invest-ability daily 07/10/21: Gimme Shelter

Is the government’s lack of detail on its housing plans hurting the housebuilders?

House prices are still soaring, according to the latest figures from the Halifax, which reported the fastest monthly rise for 14 years lifting annual house price inflation to 7.4 per cent. For homeowners that will feel like good news, and perhaps inject a bit of confidence back into the economy – housing wealth has a ripple effect that underpins much consumer spending. For those not on the ladder, it will be less welcome, and I doubt they will be soothed by Boris Johnson’s promise in his Conservative Party Conference speech to fix the “broken” housing market – we have heard that many times before.

I am sure that the new secretary of state for Levelling Up, Housing and Communities, Michael Gove, will have some radical ideas of how to do so, though; he has had lots of radical ideas before, after all, not least during his tenure as Education Secretary which completely solved the problems in our education system. Apologies – politics brings out the lowest form of wit in me.

Anyway, Boris’s plan – and I use that word in the loosest possible sense – would on the face of it appear to be good news for the housebuilding industry; offer young people more 95% mortgages and build lots more homes on brownfield land in the right places with great transport infrastructure. Easy peasy.

The reality is that, even though lots of homes have been built under the conservative government, as Boris claimed, it has become more and more difficult for many young people to buy them, despite support from schemes like Help to Buy. The median house price in England and Wales has risen from £104,000 in 2002 to £243,000 as of September 2020, a compound annual growth rate of 4.6%. Wages, on the other hand, have risen at half the pace, leaving the house price-to-earnings ratio at approaching 8, up from 5 at the start of the series. You see the problem?

Indeed, it may be an obvious one, but it is far from easy to solve without major political interference in the market, which is perhaps why the share prices of housebuilders – not long ago the darlings of the stock market – have not been doing well for some time, despite the continuing red hot housing market.

There could be several more reasons for this recent wobble, which has come despite some upbeat trading news from the sector over the summer. Crest Nicholson lifted its profit outlook in June and reinstated its dividend, at the start of September Barratt said it would hit the top end of profit guidance, and a day later Berkeley said the same. All used the identical word to describe the market – “robust.”

But there are headwinds, not least the end of the stamp duty holiday at the end of September, the tightness in both the labour and materials markets, and general concerns about the economy. In other words, will the industry be able to build as many houses as the market expects and will people have the confidence to buy them?

Meanwhile there is the general uncertainty about what Boris means when he talks about building in “places where homes make sense.” Covid may have changed working patterns in the short term, but we still don’t really know whether those changes will stick, or where industry may choose to relocate.

And while ‘Building Back Better’ and ‘Levelling Up’ may be the favourite buzz phrases of the Tory PR machine, actions as ever speak louder than words. Housebuilders are already having to cast their nets wider than their favourite stomping grounds of London and the South East as those markets weaken, but can only guess where the government’s plans should take them. Gove has yet to give many clues – in his conference address, he gave only the loosest definition of ‘levelling up’, mentioned housing only once, and didn’t mention planning reform at all, even though a planned shakeup of the planning system is likely to be ripped up in favour of stronger local decision making that allows “communities to take back control of their futures.”

I’m all in favour of that, given the everyday ineptitude of central government, but it surely won’t help them get to their target of 300,000 new homes a year. That shouldn’t bother the housebuilders, though, who can still pick and choose their sites and build at a pace that is best for their bottom line – as is the way in free markets. But it is the threat that under a radical levelling up agenda focused more on affordable and social housing – which Mr Gove hinted at in a conference fringe event –  the market may become less free, and less profitable, than shareholders have come to expect.

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