Housebuilders’ sentiment is a key component of overall confidence in the property market. While economic growth is a key determinant of housing demand and many indicators point to a short-term slowdown in the overall UK economy, there are some tailwinds.
House-building activity has shown a strong increase over the past two years, boosted in part by changes to the "office to residential Permitted Development right". Planning permission for new homes has been increasing and is now just short of the pre-crash peak in March 2008, according to the House Builder Federation (HBF) and consultants, Glenigan. While there may be some time lags before builders can start building, the figures are a strong indicator of future supply.
In our view, UK housebuilders are on a much more secure footing than they were in 2008, when they last suffered a similar rout. They have maintained discipline in paying out significant dividends, have held healthy reserves on their balance sheets and have not tried to expand too rapidly during the good times. All the major house builders have large land banks which were largely bought at low prices and we believe margins should survive a period of lower prices.
We see other economic fundamentals also providing support for UK housebuilders. After more than seven years at 0.5%, the UK base rate was cut to a new historic low of 0.25% in early August. This islikely to mean lower borrowing costs for developers and lower mortgage rates for buyers. On the flip side, near-zero deposit rates and Consumer Price Index (CPI) annual inflation at 0.6%, and rising, means that investors who keep their money in cash look likely to lose in real (inflation-adjusted) terms. We think they may look to other asset classes, including property, for inflation-beating returns.
Phil Hooper, Head of Housing at RBS Real Estate Finance believes the fundamentals of the mainstream UK housing market remain strong despite political and economic uncertainties. “The larger house builders have been the driving force behind a steady increase in completions over the last five years, and this growth is both measured and sustainable” Hooper said. However, he did note disappointment at the lack of smaller new developers entering the market, putting this down to “the time it takes to delivery a site through planning to completion and the capital investment required to match it.”
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