The housebuilding sector started 2020 on the front foot thanks to the decisive victory by the Conservative party in the December 2019 general election.
The big majority seized by the pro-business Tory party injected optimism into the industry. The win for Boris Johnson’s Conservatives – who ran with a view to ‘get Brexit done’ – also put to bed the prospect the UK might hold a second referendum on EU membership, which set the scene for the UK to leave the EU in late January. A number of firms said they saw an uptick in customer interest after the election. It would appear that some people were holding off buying property until the political landscape became clearer. However, political uncertainty could reappear toward the end of 2020, when the UK will exit the transition period.
In recent years the sector has been fuelled by low interest rates, the Help to Buy scheme, and a willingness for banks to lend. The UK economy was in good shape at the start of the year as the unemployment rate was on par with levels last seen in the 1970s, and earnings were comfortably outstripping inflation, so workers were getting an increase in real wages. A strong economic backdrop combined with political stability provided a decent foundation for the housing market. The bulk of the big listed housebuilders saw their share prices go on to set record highs in early February, so traders were clearly bullish on the industry.
When the Covid-19 crisis took hold in the UK, there was a broad-based sell-off, so homebuilders took a hammering along with everyone else. The situation became even bleaker when banks such as Barclays and Halifax pulled a large portion of their mortgage products, a decision they have since then reversed. Rightmove, the property portal, said there was huge drop-off in the number of people offering to sell their properties. When the lockdown was introduced, government guidelines were for people not to move property, unless they had already exchanged contracts, but the guidelines have since been relaxed. Construction sites largely ground to a halt too. The industry was effectively frozen.
In reaction to the pandemic, the Bank of England cut interest rates to 0.1% – a fresh record low – but keep in mind in January they were only 0.75%, so they didn’t have that far to fall. Some would argue the recent rate cuts aren’t going to make much of a difference to the economy, as a slightly lower borrowing rate is unlikely to encourage people to take out a big mortgage, for instance. At the same time, cheap mortgage rates are no bad thing as far as the property market is concerned. A report from last month found that even though some mortgage rates have fallen because of the BoE rate cuts, others have actually risen. The FCA have called on mortgage providers to treat their customers fairly and pass on the rate cuts.
The UK construction PMI report for April crashed to 8.2, a record low. Keep in mind that 52.6 was registered in February – which was the strongest report since late 2018. The UK construction output for February was -1.7%, which was a fall from the -0.2% posted in January. If the output was falling off in February, the March reading will probably be even worse again.
There has been a lot of speculation about what will happen to house prices in the months ahead. The general consensus is they will fall, but industry professionals remain divided over how far they will slide, and what sort of a recovery will be witnessed. The house price reports have been mixed recently. The Halifax report for April showed that prices were down 0.6% on the month. The Rightmove update showed a 0.2% decline in April, while the Nationwide reading showed 0.7% growth in April. Mortgage approvals tumbled from 74,000 in February – the highest since March 2016 – to 56,000 in March, the lowest level in seven years. The mortgage data would suggest there was a huge fall in demand, but that could be a function of some banks cutting back on the number of mortgages being offered. Seeing as unemployment is tipped to jump, it is fair to say that property demand is likely to wane in the near-term.
For all the doom and gloom doing the rounds, there has been some positive news stories. Vistry, formerly Bovis Homes, was the first of the big housebuilders to return to work as operations resumed last week. Taylor Wimpey and Persimmon also recommenced work in the same period. Bellway began phased work on Monday. Barratt Developments will start preparations for new working guidelines next week, while Redrow will start preparing sites for the new working conditions too, with the view to reopening approximately 50% of sites in the near-term. Barratt, Bellway and Redrow were the only firms of the bunch to confirm that customer interest has been mediocre since the health emergency struck.
The firms will be adhering to strict social distancing guidelines, and they will be predominantly focusing on projects that are near completion. The level of activity that will be undertaken in the next few months is likely to be tiny in comparison to the pre-pandemic levels, but any progress should be welcomed. These days if you are taking any steps back toward normality, that sets you apart from the crowd.
On a year-to-date-basis, Berkeley Group are the best performer as the stock is down only 16%. Vistry are the worst performer as the stock is down 42%, but keep in mind it rallied over 60% in 2019, when it was still known as Bovis Homes. The group changed its name to Vistry in January just after it completed the takeover of Linden Homes, the housebuilding arm of Galliford Try. It is possible that Vistry’s underperformance was driven by the fact it finalised a £1.1 billion takeover deal, shortly before the health crisis struck.
The industry was very strong in advance of the health emergency, and some people would say it was overstretched. On average, the big six homebuilders saw their share price fall by 28% YTD, while the FTSE 100 and the FTSE 250 are down 22% and 27% respectively. The sector is only starting to emerge from the lockdown. It is encouraging to see that activity has restarted, but the real test will be whether client demand bounces back or not. Some industries are likely to remain in the doldrums in the near term, so the housebuilding sector is moving in the right direction, which is likely to pop up on traders’ radars.
BY DAVID MADDEN
Source: CMC Markets