HBF Weekly News Summary, 12 November 2004

12 November, 2004

A weekly news summary by Pierre Williams, HBF head of media, covering all aspects of the housebuilding industry. Available to members only.

Bank of England Predicts Price Falls

It’s official. The Bank of England this week predicted house prices will fall. Governor Mervyn King stressed that falls were likely to be moderate, that the downward adjustment of prices relative to incomes might continue for two or three years and that a slump was “unlikely”. But he added that the overall outlook was “extremely uncertain”. He said: “In terms of when the decline might start, I suppose you could say ‘last month’ because you’ve already seen some signs of falls. It’s the first time we’ve made a statement like this.”

His comments have been criticised by economists who say they will dent buyer confidence further, causing bigger price falls. On a more positive note, his comments suggest the next move in interest rates will most likely be down, not up.

HBF Note: Despite plenty of guessing, the reason why the Governor made the comments is not clear. The only viable reason seems that of prompting a little pain now to avoid agony later on. An FT sketch of a conversation between King and his aide Paul Tucker concludes that the only thing the Bank is “absolutely” sure about is that it has no idea how long or by how much the market will fall.

Surveys Suggest Market Gloom

Confidence in the housing market has fallen sharply over the past month according to the latest survey, with 54% of buyers and sellers expecting prices to fall in the next 12 months compared to just 32% in September and just 9% in January. Most expect prices to fall an average 5% over the year with the biggest falls predicted in the South and East Midlands. Meanwhile Islington in North London has become the first and only part of the country to register an annual fall in prices. Land Registry figures show average prices in the borough slumped by 7.4% in the three months to September compared to the same period a year ago. Nevertheless, average prices across England and Wales increased 16.27% over the year. (All media)

High Street Spending Finally Slows

In a sudden change, the latest figures show High Street spending stalled in October, according to the British Retail Consortium. The credit reference company Experian also says consumer confidence has weakened to its lowest point for a year. Although this is unwelcome news for the retail sector, the figures suggest that a further rise in interest rates is now a very slim possibility for the foreseeable future. (Sunday Times)

South East Councils Gang Up On Prescott…

County council leaders in the South East are lining up to challenge John Prescott’s blueprint for increased housebuilding in the region. The proposals from the South East England Regional Assembly (SEERA) to build either 32,000 or 36,000 new homes each year - up from previous recommendations of 29,500 - has prompted growing discontent among county council leaders. As a result, a clearly rattled SEERA decided not to make a firm recommendation for approval but instead voted to send a questionnaire to every household to gauge views. The Tories’ local government spokesman, Caroline Spelman, accused Prescott of stealing planning and housing powers from local government, asking him: “Will you return the crucial powers of housing and planning to democratically-elected councils?” In response Prescott said the assemblies would stay but suggested their Tory members should quit if they weren’t happy serving on them. (FT, Mail)

…Prescott Urged to Resign

John Prescott is facing calls for him to quit after his plans for regional assemblies were resoundingly defeated in a North East referendum. This defeat greatly weakens Prescott’s hopes for so-called “mini-parliaments” across the country.

HBF Note: What this means for the government’s housing plans is even more significant. It means the opposition parties can now justifiably attack these regional assemblies on “democratic” or “moral” grounds. And this is exactly what’s happening. Following the referendum, Tory MP Mark Francois said: “The Deputy Prime Minister has advanced a strong argument for the continuing devolution of powers to local authorities. May I ask him to follow the logic of his argument? Will he devolve back to local authorities the power to decide how many houses should be built in their areas? Surely it is better that directly elected local councillors decide how many houses their area can bear, rather than having numbers imposed on them by unelected regional bodies whose moral authority has been destroyed by what happened in the North East.”

However, in what appears to be a response to this, Prescott subsequently announced that Brown, Blunkett and Clarke are all to speak at the “Delivering Sustainable Communities Summit” early next year. This line up of heavyweights can be expected to highlight the need for housing delivery to go ahead.

Death of the Middle Class Dream

Climbing the property ladder has always been tough, but the rung between trading up from a flat to a semi has become so wide that for most it is now an unrealisable dream. That’s the finding of a Halifax study that concludes that the majority of middle class families can no longer make the jump. The Halifax’s chief economist Martin Ellis explained: “In the past, young graduate couples could confidently dream of the well-worn path from a graduate flat to three-bed family home before snaring that five-bed dreamhouse in the suburbs. But with prices rising by 244% in the capital and at least 82% in our cities over the last 10 years, that kind of progression is increasingly difficult.” Countrywide’s Alan Greig, said: “We’ve always prided ourselves on being a nation of prudent homeowners but unless we urgently develop greenfield sites on our city boundaries with affordable mid-market homes, I can envisage a situation where we’ll become a nation of tenants - like the Belgians, Germans and Scandinavians.” Pierre Williams for HBF said: ”With Britons continuing to aspire to a house in the country, we believe balancing the supply of flats and houses is essential. There is a danger of this drive for high-density becoming too successful and resulting in a one-size-fits-all approach.” (Observer)

HBF Note: This is very worrying stuff. HBF has consistently pointed out how industry has responded to the call for smaller, higher density housing, notably flats. However, if government wants “sustainable communities” it would be well advised to allow housebuilders to provide the broad mix of housing types needed to cater for all types of household within these hoped-for “communities”. One size never fits all and this time is no exception.

Numis Cuts Housebuilder Projections

Housebuilders are set to feel the pinch now that the slowdown in the market is effectively confirmed, say stockbrokers, Numis Securities. The firm has also cut its target prices on the shares by an average 5%. It argues that all the largest builders are at best a hold and that in most cases investors should cut their stakes. This advice comes despite a general uplift in stock prices last week following the Bank of England’s decision to keep interest rates on hold. (Mail on Sunday)

Personal Bankruptcies Hit Record High

The number of personal bankruptcies has hit an all-time high over autumn as increasing numbers of households struggle to cope with interest rate rises. The Bank of England’s five successive quarter-point rises over a seven-month period resulted in a 35% increase in borrowing costs. There were almost 12,000 personal insolvencies in the third quarter - 31% up on a year ago. Insolvency experts said many households faced being squeezed between the rising cost of borrowing and falling house prices. Particularly at risk are those who borrowed against their homes to pay off credit card debts. A spokesman for accountants Grant Thornton, said: “Any reduction in house values could see this popular ‘get out clause’ disappear.” (Independent)

House Prices Could be Included in Inflation Figures

Following pressure from EU officials, house prices are likely to be included in the Bank of England’s official inflation index within two years. The Bank’s governor, Mervyn King, is not keen but is expected to fall into line as Eurocrats press for a harmonised calculation of inflation rates across all EU nations. But the real problem is that as house prices over the long term outstrip general price inflation, (as proved by Barker) their inclusion will raise inflation and put pressure on the Bank to raise interest rates as a result. Of course in the short term, if prices stay flat or fall, this could have the opposite effect. (FT)

Housebuilding Up Sharply

Private housebuilding starts have jumped by 13% in the three months to September compared to the same period last year. This was the largest quarterly rise since Labour came to power. But HBF has dismissed government claims that this rise is tackling undersupply. Completions may be up from 2001’s historic low (162,000) but with household growth now revised upward from 230,000 to 280,000 a year, undersupply continues to worsen rapidly. Pierre Williams for HBF, said: “Production would need to increase by 70% just to stand still, let alone tackle the backlog of unmet need.” He added that the industry was adjusting to the new market conditions by boosting volumes, especially of lower-priced housing to cater for pent up demand from first time buyers. (See following Bovis and Barratt items) (Independent)

Bovis Sounds Note of Caution

Bovis Homes has warned that sales may fall below target this year as the recent slowdown has resulted in reservations running at only 6% above last year’s compared to an earlier forecast of 10%. But the company is confident of the future and is gearing up to produce higher volumes of lower-priced housing to stay within reach of first-time buyers. Last year Bovis sold 2,482 homes. Next year it plans to sell 2,000 units at under £200,000 compared to 1,550 this year. Analysts were impressed and said that although Bovis might sell 100 fewer units this year than expected, lower interest payments, profits from land sales and higher rents from commercial holdings would compensate. (FT, Telegraph, Express)

HBF Note: The FT also seems happy with the strategy of “one of the City’s favoured housebuilders”, although it warns that while homes for £200,000 sound cheap, they are still beyond the reach of many.

Bullish Barratt Booms on Brownfield (and rescues a dismal week)

Barratt has announced its 12th consecutive year of record results proving itself the country’s leading brownfield regenerator in the process. Completions exceeded 14,000 of which 82% were on brownfield. Turnover increased 16% to £2.5bn, pre-tax profits rose 27% to £367.7m and earnings per share increased by 20%. Forward sales increased 10% providing a good start to the new financial year and land stocks increased by 29% to 56,000 plots or four years supply. Group Chairman, Charles Toner, said: “We remain committed to further steady growth. We have plans to establish up to four new divisions in key growth areas giving us the capacity to increase production towards 20,000 homes per annum by 2010. This growth plan will, naturally, be adapted to market conditions but with the main fundamentals remaining sound we are confident the plan is achievable.” Shares rose 6.5p on the news to 522p. (FT, Telegraph)

Editor’s Note: With news like this week’s, you’ll probably be delighted to hear that Weekly News Summary is taking a break. But it’ll be back in early December.