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The UK housing market has long benefited from the widespread belief that “you can’t go wrong with bricks and mortar”.
And investors who bought housebuilders in recent years have been laughing all the way to the bank too. 2017 was a particularly good year for the sector, as stocks recovered from the unthinking sell-off that followed Britain’s vote to leave the EU in 2016.
But now, house price gains are slowing. In fact, prices in London fell last year, according to Nationwide, for the first time since 2009.
So is it time to take profits on the housebuilders?
The picture from housebuilders is pretty clear – the fun’s over
Recent reports from UK housebuilders paint a pretty ugly picture of the market overall.
Yesterday, retirement housebuilder McCarthy & Stone saw its share price plunge by 13%. It announced that its chief executive is set to step down this summer, and also that sales during the first quarter of this year had seen a “noticeable decline”.
What’s the problem? In short, said the builder, “a slower secondary market and a softening of pricing, particularly in the South East”.
As the FT points out, if second-hand homes are selling more slowly, that’s a bigger problem for McCarthy than for your average builder. The company is largely selling to people who are downsizing, rather than first-time buyers.
That exposes the firm to two big threats. Firstly, there’s the timing. If downsizes are taking longer to sell, with more deals falling through, then that naturally means that McCarthy & Stone’s sales will slow down too.
Secondly, a slower secondary market tends to mean falling prices. If downsizers make less money from the home they are selling, that means they have less to spend on their retirement property.
The situation is bad enough for downsizers as it is – these retirement properties are not cheap by any means, so the amount of money people hope to raise by moving house is often a lot smaller than they might have expected from hearing about years of property price inflation. Squeeze that too hard, and people might start to wonder why they’re bothering to move at all.
So it’s fair to say that McCarthy & Stone gives a pretty clear indication that the London market – and by a knock-on process, the market in the southeast – is struggling.
Crest Nicholson was another recent casualty in the sector. Last week, it warned that profit had dipped in the six months to the end of April due to “generally flat pricing” for its properties. It had also seen its costs increase.
The company is retreating from the London market. As chief executive Patrick Bergin put it: “even in the outer zones of London the pricing momentum is not with us, and absolute affordability is now quite stretched”.
The latest builder to warn on London is Berkeley Group (Full disclosure: I own Berkeley. I bought it in the post-Brexit vote panic when everything related to property in the UK and London in particular was being flogged off indiscriminately. It has a good track record of coping with the cyclical nature of the building industry).
This morning, the company posted a big jump in pre-tax profits for the year to the end of April 2018. However, the big profit was driven partly by investments in cheap land bought between 2010 and 2013, which means profits are set to fall sharply next year by comparison – about 30%, according to the company.
Tony Pidgley, the chairman of the group and someone who has done a pretty good job of weathering previous slowdowns, pointed out that “it is telling that some funders and builders are choosing to exit the market when faced with the degree of risk and regulation that now confronts development in the capital”.
The smart money is cutting back
It’s pretty clear from all this that the good times for London-focused builders are now in the rear-view mirror. But I suspect that’s the case UK-wide too.
As a non-local, I’m keenly aware that London is all too often treated as the centre of the universe by our media. However, when it comes to the UK property market, it does exert a pretty strong gravitational pull and you’d be stupid to ignore it.
London prices go up. That has a ripple effect – people who would have bought in London, buy in the southeast instead. Investors who can’t afford that then buy further out – for example, buy-to-let investors are now focusing further north, where they can still get yields that might just cover their costs if everything else goes 100% right.
But the ripple works in reverse too. The reasons behind the London slowdown – lack of affordability, alongside a realisation that being an amateur landlord is no longer a growth business – will have an impact across the board.
The bonanza days are over. The politics of Help to Buy will start looking precarious as tales no doubt emerge of early buyers under the scheme running into trouble when they try to sell. And a focus on affordability – which after all, is the key political issue here – suggests that the squeeze on pricing will continue.
Builders might find that they have to become more productive – coming up with innovative solutions as opposed to building ever more glorified rabbit hutches with multiple en-suite bathrooms. That would be a good thing, but it’s not likely to happen quickly and it’s not likely to be cheap to implement.
I also find it interesting that one of the smartest proponents of the case for house builders in recent years – Gary Channon of Phoenix (who run the Aurora investment trust) – cut the fund’s holdings in builders during the first quarter of this year from around 18% to 10%.
At the time, he noted: “Although housebuilders are good value and likely to deliver attractive long-term returns, we must recognise that the current conditions could not be more favourable in every regard and so it is reasonable to expect that the most likely future path is for a deterioration in some of these positives.”
In other words, “this is as good as it gets”.
Overall, I reckon that this marks the peak for this cycle on the housebuilding front. If you’ve made a lot of money in the sector, then good for you. It might now be time to look at protecting some of it (and yes, I’ll need to revisit my own portfolio and consider what to do about Berkeley).