Housing market shows unexpected resilience

Published 08th Jul 2011

Housebuilders see signs that the housing market is proving more resilient than many feared due partly to pent up demand from people who need to move house despite mortgages still being tough to obtain.

Builders Persimmon (PSN.L), Taylor Wimpey (TW.L), and Bovis Homes (BVS.L) said this week sales in the traditionally buoyant spring period have held up, lifting shares across the sector and giving a boost to an industry that is suffering from a four-year hangover from the credit crisis.

"I can see relative stability (into 2012)," Bovis Homes (BVS.L) Chief Executive David Ritchie said, noting a 16 percent rise in first-half reservations for private homes.

Morgan Sindall (MGNS.L) confirmed a "slight improvement" in market conditions, while Galliford Try (GFRD.L) reported annual housing completions up 27 percent to 2,170 units.

"I think there is a general thawing out there ... what I've been encouraged about is, is against the backdrop of pretty negative press commentary against the consumer squeeze...you've seen a much more resilient profile from the housing market," said Chris Millington, an equities analyst at Numis Securities.

Shares in Persimmon, for example, have risen 8 percent in the past two weeks, outperforming the FTSE 250 midcap index.

The slight improvement in confidence is supported by house prices rising unexpectedly in June.

The wider economy is struggling as British consumers grapple with rising prices, particularly in fuel and utilities, subdued wages growth, job insecurity, government austerity measures, as well as fears of interest rate rises.

New data on Friday showed that wider construction activity in the UK grew by just 0.4 percent in May, adding to evidence that the economy was stagnant in the second quarter.

The housebuilding sector is operating at all-time lows, but pent-up demand is driving the recent uptick in activity, while the biggest obstacle for the industry -- mortgage availability -- is easing slightly.

"You've seen a marginal improvement in the mortgage market and an inability of people to keep deferring decisions to actually move ... that's the bigger driver of what's going on," added Millington.

Other analysts point to the long-term prospects for the sector and house prices generally as positive.

"A combination of a finite supply of land, strict planning regulations, insufficient housing completions and an increasing population are all likely to place upward pressure on house prices," said analysts at Killik & Co.

RISKY BUSINESS

But times are still tough for first time buyers, who face hefty deposit requirements from mortgage lenders that are showing little appetite to loosen their purse strings due to regulatory constraints.

Potential first time buyers also have to cope with rising rents, student debt and a weak jobs market.

"It would be hard enough for young people normally to save up a deposit, but you add in all those things, and the high prices of housing...this is massive, massive social and economic issue," said John Stewart, director of economic affairs at the Home Builders Federation (HBF).

Housebuilders and lenders have joined forces to tackle the problem, with discussions centred around bridging the deposit gap.

"If the industry can come together to offer a form of mortgage indemnity, it would be a powerful tool in securing new build sales in the current market," said Simon Brown at Northland Capital Partners, adding that no deal was in sight for the next few months.

The HBF said the only viable long-term answer had to involve third party groups such as insurers underwriting loans to first-time buyers, as opposed to builders taking on this added risk.

But the housing industry recognises there is unlikely to be a quick fix.

"The longer term is being talked about now in earnest, there is a will to produce something on both sides... Without the mortgage market, we can't push that (growth) forward," said Mike Farley, the chief executive of Britain's larger housebuilder

Source: ' Reuters '

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