Barratt Development, more good news for UK house builders

Barratt Developments share price may be down slightly today, but that is probably more due to the general market being down and the fact that in recent days it went up on the back of other good trading updates from listed UK construction companies, than any bad sentiment towards the company. The share has had an amazingly good run the last 18 months or so, like others in the sector defying bear calls that it is overvalued. 

That run looks set to continue as Barratt follows others by confirming that the Government's Help to Buy scheme is playing its part.

Mark Clare, Group Chief Executive commented,

"As more house buyers return to the market, supported by improved mortgage availability and the Help to Buy scheme, we are in a strong position to continue to grow the value of the business. We are increasing our investment in land whilst reducing debt and have delivered a performance ahead of expectations. Momentum is continuing to build and with forward sales up substantially, we are confident we can improve our performance still further in the year ahead."

http://www.digitallook.com/news/rns/21017935-10120/BDEV-Trading_Statement_html?ac=,&username=,

While valuations of UK house builders are already stretched and there is a lot of good news already baked into their share price cake, don't be surprised if we seeing the still early stages of a bubble in prices for these companies.

More posts on house prices and house builders below:

Help to Buy, the new housing benefit

Bovis Homes update

Taylor Wimpey benefits from Help to Buy

Persimmon reports

Telford Homes update

UK house prices, case of too big to fail.

Help to Buy, the new housing benefit?

Bovis Homes reported today, following on from a number of trading statements towards the end of last week from other house builders and as expected the news was good.

David Ritchie, the Chief Executive of Bovis Homes Group PLC said:

"The Group has performed well in the first half of 2013 with a significant further improvement in housing profit, delivered from the ongoing successful execution of the Group's growth strategy. Trading in the first half of 2013 has been strong and the Group has achieved a 40% increase in private reservations compared to the same period in 2012. Continuing its success in the land market, the Group has added 2,767 new consented plots to the land bank. With the positive progress in executing its growth strategy, the Group is well positioned to deliver higher shareholder returns."

It goes on.

Market conditions

Even though the general economic background remains challenging, the housing market has shown signs of strong improvement. Consumers are increasingly able to access mortgage finance and the launch of the Help to Buy shared equity scheme, replacing FirstBuy, has had a positive effect on customers' confidence to buy a home and their ability to transact. These positive effects are expected to support greater activity in the new homes market, which in turn will provide an impetus to the number of new homes built. The Group continues to view positively the Government's initiatives to support the housebuilding sector.

http://www.digitallook.com/news/rns/21012367-11178/BVS-Trading_update_html

Of course it does.  How can any company not be thankful that the Government is potentially poring billions of pounds in taxpayer money its way? Supposedly this is to kick start a market that hadn't really seen a big fall after the financial crisis set in, but in reality was effectively dying a death from inactivity because of what happened before the financial crash.

Bovis Homes, IMS confirms more buying interest thanks to Government help

Following on the theme set out here that UK house prices cannot be allowed to fall by any significant level, it has been interesting to read the management reports of market quoted companies like Taylor Wimpey, Barratt, etc as to any pick up in business since the Government announced its intention to help prop up the market in the last budget. Today Bovis Homes reported and they basically confirm what we already should know by now, that house building construction should continue its bullish trend going forward.

They reported;

David Ritchie, Chief Executive, commented:

"The ongoing success of the Group's growth strategy has driven strong trading in early 2013.  Homebuyer sentiment has been improving and, with the recently announced Government initiatives, sales rates have increased ahead of management's expectations.  The increased number of active sales outlets in excellent locations, delivered from the Group's assertive land buying over the last few years, provides a great opportunity to take advantage of the improving market backdrop and further strengthen shareholder returns."

Current trading

Trading in the 19 weeks to 10 May 2013 has been strong with the Group achieving 989 private net reservations (2012: 783), a 26% increase year on year.  This has been driven by an 11% increase in the average number of active sales outlets to 91 (2012: 82), and a 14% improvement in the average private sales rate to 0.57 net reservations per site per week (2012: 0.50).  The number of visitors to the Group's sites has increased by 29% in the year to date compared to the same period last year.

http://www.digitallook.com/news/rns/20899760-11178/BVS-Interim_Management_Statement_html

Valuations of these companies may well be stretched already, but momentum is with it and the sector is likely to remain bullish given the size of Government intervention. It is unlikely that Government will do anything to harm this sentiment given the importance of the home owning/desire for ownership vote that exists in the UK. Regardless of who the Government is, they are likely to throw taxpayer money at the housing sector if at any stage prices look to be lagging or demand is down because people can't afford to buy because prices are too high. Their answer to high prices is always to provide subsidies to buyers, I doubt that will end any time soon.

 

UK house prices, the case of a too big to fail market.

I've seen a few housing bubbles and it took me a while to realise and see that conventional economic thinking when applied to house prices simply doesn't work, at least not in the UK. In part it isn't allowed to work because the UK housing market isn't a truly free market. It tends to be free when prices are going up, but as soon as price rises start to hit a blip then we get intervention, the strong vested interests of the housing industry start knocking on the door of Government asking what are they going to do about it.

Traditional free market theory tells us that Government should do nothing, markets should be allowed to correct, but the UK housing market has become a "too big to fail" market.  Too big to fail because of the knock on effect of the fall out on both the financial and general economy that would come from any correction.

First, any significant fall in house prices would hit the already under pressure UK banks. These are the same banks that are largely responsible for the problem in the first place as they relaxed their lending criteria and lived the good life on the back of the mortgage credit boom pre-2008. Given their ongoing potential liabilities, falling house prices would only make things worse.

Second, UK property owners have increasingly seen their wealth as being in property. The growth of home ownership since the early 1980's has been seen as much as an investment as somewhere to live and call your own home. The UK obsession with property and rising or falling house prices has a political impact in that politicians know that these people are more likely to be older and vote. Any Government risks the wrath of the electorate and losing votes on the back of any fall in house prices.

Third, it should also be remembered that politicians themselves are usually personally invested in property, quite a few have their own property empires as the expenses scandal of a few years ago showed. It is not in their own interest to see falling prices.

So, Government and Central Banks tends to intervene because choosing not to has a free market consequence that is dangerous to the whole economy. If banks go under credit would dry up, businesses would go to the wall, spending would fall, recession, potential depression would be on the cards.

UK Budget update 1 - Construction Sector

One of the biggest announcements made in the budget today was aimed at the UK housing market.

The Help to Buy scheme improves on a previous scheme known as FirstBuy. It enables buyers to put down a 5% deposit on a newly built home.

Up to 20% of the cost of the home is funded by a "shared equity" loan, which will be repayable when the home is sold.

That loan will be interest-free for the first five years.

Thereafter borrowers will have to pay a 1.75% annual fee, which will then rise by 1% above the Retail Prices Index (RPI) measure of inflation.

There is also a new mortgage guarantee scheme that is being compared to Fannie Mae and Freddie Mac in the US.

The chancellor also announced a new mortgage guarantee, which he claimed would dramatically increase the availability of loans. It extends the previous NewBuy Guarantee scheme to include older houses as well as new-builds.

"We're going to help families who want a mortgage for any home they're buying, old or new, but who cannot begin to afford the kind of deposits being demanded today," he said.

http://www.bbc.co.uk/news/business-21849974

No one should be surprised at Government attempts to prop up house prices under the disguise of "helping" people, usually priced out first time buyers, who are of course priced out for a reason - prices are too high. The immediate effect of this policy has been on the share price of companies in the construction sectors, most of which are seeing a big rise today. Taylor Wimpey, Barrett Development, Redrow and others are all doing well on the back of this news as they are likely to benefit from being in the new build sector.

On the other hand, once the dust settles and people realize that house prices are still too high for those priced out it will be interesting to see how high the take up is and how relaxed the Government are when handing out taxpayers money. The recent history of Fannie May and Freddie Mac is not one that should be held up as shining light of achievement. The UK Government seems to have decided that the UK taxpayer, whether you are currently a property owner or not, will be a potential tax loser if house prices fall.