Betting on the Market
“Having been fully prepared for a slow to moderate start to 2010 we, like many other suppliers to the housebuilding industry, have had a much better first half than we had dared to hope. The reason is simple: NHBC statistics for the months of March to May indicate that the number of new housing starts is 60% up on the same period in 2009. Even when this is moderated by a significantly less impressive opening to the year, it does still reflect a market on the road to recovery.
The big question is whether this recovery will be sustained. Information coming from both government and industry in the last few weeks would indicate that this fragile recovery is facing assaults in all directions. The following are the main factors that I would identify as posing particular threats:
1. Housebuilders may be starting more sites, but they are still not selling fast enough. A dearth of mortgage credit is still restricting demand. Taylor Wimpey’s recent half year results indicate that their completions were actually slightly lower than last year.
2. Lack of government focus on housebuilding: the fact that the new housing minister Grant Shapps is not in the cabinet reflects the status of housing within the new government. Of the 87,360 English housing starts in the year 2009/10, 65,000 were in some way funded by the HCA. Clearly the level of funding is going to be dramatically reduced.
3. Kickstart will be dramatically reduced under the current government. The announcement of 24 May indicated the immediate cancellation of £200m worth of Kickstart schemes that were awaiting approval, and there is doubt over a further £600m worth of schemes whose funding was presumed to be safe, but is now in doubt. We are also not sure about whether Homebuy Direct, another initiative set up by the previous government to stimulate the housing market, will continue.
4. Further difficulty is put in the way of developers by the removal of centrally determined targets for new housebuilding (allowing local planners to obstruct proposed development) and the re-categorisation of gardens as greenfield rather than brownfield land a particularly significant factor for the South East.
5. The cancellation of large infrastructure projects may well have a knock-on effect on housing developments – for example, the cancellation of the proposed A14 motorway extension has effectively stopped the construction of up to 9,000 houses in Cambridge planned to capitalise on improved access.
With all these gloomy indicators around, it is easy to forget that there is still huge pent-up demand for housing in this country: the single most important constraint on the market, I believe, remains the lack of mortgage credit. Getting the private sector housebuilding market off its feet requires banks to start lending again and this surely need not be impossible to achieve.
Bovis Homes has started an intriguing initiative by working with Barclay’s to effectively guarantee mortgages taken out by their customers in a bid to offer 90% loan-to-value home loans. Under this scheme, the bank agrees to give 90% mortgages on the proviso that a proportion of the loan is underwritten by the developer. This seems like a good way to stimulate sales with limited risk as a liability would only arise iv both the borrower defaults and the property has to be sold below its purchase price.
Since the government now effectively owns most of the other banks, I don’t see why it can’t either insist on more mortgage lending or why it doesn’t set up similar schemes to the Bovis initiative with RBS, Lloyds and Northern Rock – and if principle sounds familiar, perhaps it’s because mortgage guarantee insurance was just part of life 20 years ago.
I would call wholeheartedly on the government to take action not to stimulate demand, but to allow the demand that exists to be satisfied. There isn’t any sign of immediate action in this direction yet, but if we continue to press home the message that investment in housing stimulates economic growth (rather than the other way around) we may see results in forthcoming months.
And on a lighter note – at least we were spared the introduction of VAT on new housing that the Liberals were proposing.”