Cautious optimism may be warranted in regards to UK housebuilders following recent positive indicators in the construction sector. New construction is up on increased demand, house prices are rising and mortgage approvals have increased. On the surface, this is all good news. Below the surface, pitfalls still exist which may make it difficult to sustain growth going forward.
Stock Prices
Stock prices of the major housebuilders have shown some strength since the beginning of 2009, with shares of Redrow, Bovis Homes Group, Bellway and Persimmon up 40% or more. Barratt Developments Plc and Taylor Wimpey Plc , the two most prolific builders, have seen their stock prices nearly quadruple since January 2009.
At this point, analysts generally believe most housebuilders are fairly priced or even still slightly undervalued, with share prices already discounting any potential worst-case scenario.
Construction Starts
After the credit crunch began in 2007, the construction economy put on the brakes too. With demand weak, builders concentrated on finishing their nearly completed stock, but have been wary of opening new sites.
In 2009, new construction has increased again, but this is due in large part to depletion of finished and partly-completed stock. Output had fallen so drastically by the end of 2008 that the recent increases still leave the sector well below pre-recession levels.
House Prices and Demand
House prices have trended upward since March, and housebuilders have seen increased interest. This should be good news, but it remains to be seen if there is any substance to the apparent increased demand.
Mortgage Lending
Mortgage lending remains a sticking point in any anticipated recovery. Banks have been shrinking their balance sheets and lending less. Even banks with solid balance sheets are remaining cautious as long as the economy is in a slump. Overseas lenders have mostly abandoned the UK market until conditions improve.
Lending volume has grown steadily in 2009, but the base at the beginning of the year was so low that mortgage approvals are still well below the "natural churn rate" - sales made due to "natural" events such as marriages, births, deaths and children moving out.
Mortgage lending restrictions prevent most people from qualifying for a loan. Loan-to-value ratios average about 75%, and many prospective housebuyers cannot afford the deposit. Banks are leery of increasing the LTV, for fear of the home loans market once again spiraling…
