This week’s trading update by Persimmon (LONDON:PSN) would appear to run counter to concerns that the recent revival in the housing market is running out of steam. A rise in revenues of 23%, along with a rise in selling prices of 5% points to a sector that still appears to be growing despite worries that demand for new homes is being impacted by slowing house prices and reduced loan demand.
Over the past few months we’ve seen a steady decline in mortgage approvals from a peak of 76K in January last year to 59k at the end of last year and the lowest monthly number since the middle of 2013. We’ve also seen data showing the slowest pace of house price growth in eleven months with the Halifax measure showing annual growth of 7.8%, down from a peak of 10.2% in the middle of last year.
This has raised concerns that housing market activity could well be more subdued in 2015 as we head towards an election which is likely to be anything other than inconclusive. This slowdown in prices should not be treated as a bad thing though given how quickly house prices were threateningly to spiral higher in 2014, amidst talk of a bubble.
The Mortgage Market Review of last year and recent curbs by the Bank of England on Loan to Income caps appear to have done their job with respect to making sure that lenders are more sensible about how many new mortgages they make available.
Even allowing for these new sensible safeguards if Persimmon’s order book is any guide the outlook remains positive with demand still outstripping supply with pricing being set at more realistic and affordable levels. Persimmon reported that it would be opening a number of new sites in 2015 with many properties already reserved or forward sold.
Next week we will be getting trading updates from Taylor Wimpey Plc (LONDON:TW), Barratt Developments Plc (LONDON:BDEV) and Bovis Homes Group (LONDON:BVS) and if these paint a similar picture then the outlook for income and profits growth for all the major house builders remains positive, despite concerns about a mansion tax being implemented after the next election.
The recent changes in the stamp duty thresholds announced by the Chancellor last month, could well have shot that particular fox, due to the way they disproportionately affect properties over the £2m mark, and which probably also accounts for some of the slowdown in prices seen in recent weeks in London.
The changes are also likely to act as a significant boost to the cheaper end of the house price chain due to the cost savings made as a result of the removal of the slab based structure of the duty.
Another factor likely to help is the reluctance of the Bank of England to raise interest rates with some expectations of a rate rise now potentially being pushed into next year, while the recent decline in oil prices could well filter through into more disposable income as inflation continues to drop below average earnings.
Both Taylor Wimpey and Barratt returned to the FTSE100 last month and given that they are both exposed to the lower end of the housing market they are likely to feel the benefits of the recent stamp duty changes more than most.
Barratt Developments returned to the FTSE100 last month and over the last 12 months has expanded its work force by nearly 40%. Last week's announcement of another 600 new jobs across the North East suggests that the company is optimistic about its prospects. Given that it is also more exposed to the lower end of the housing market it is likely to feel the benefits of the recent stamp duty changes more than most, particularly if interest rates remain at their current low levels then it stands to reason that demand for houses is likely to remain good.
Taylor Wimpey suffered more than most after the 2007 property slump with its share price still well over half the value it was at its peaks, but here also its pipeline is healthy and the company has enough land for the next two years in all parts of the UK, and was recently given the green light for 290 homes in the Nine Elms regeneration zone at Battersea. The company is also optimistic about its Spanish operation, given the record tourist season just seen in the country, with hopes high that 2015 will be even better.
If these two companies can show similar strong rises in revenue and profit expectations as sector peer Persimmon then there is no reason to suppose that 2015 can’t be a good year for the housebuilding sector, despite the prospect of a significant amount of uncertainty this year.
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