Watch out: the housing market is about to turn back down
Dominic Frisby Nov 05, 2009
House prices slump is over' screamed a recent Daily Express headline. Nationwide had just reported the first annual rise in house prices for 19 months, with prices up 2% year-on-year in October.
Meanwhile, the most recent Rightmove report shows that the average asking price in London jumped 6.5% to £461,157 in the four weeks to 10 October, sailing through the high of £412,731 set in November 2007. Asking prices are also rising across the rest of England and Wales.
And while transactions may be low, bullishness is here once again. A Rightmove survey of more than 30,000 people found that just one in ten believed prices will be lower a year from today.
That's funny, because I think just the opposite. The next leg down in housing could be right around the corner. Here's why...
House-builder stocks anticipate the housing market
Below is a long-term chart of the Nationwide house price index (blue line) versus the share price of Barratt Developments (LSE: BDEV) (red line). As probably the UK's best-recognised builder, we will use it as a proxy for the house-builders. As you can see, it made a low in early 1992, re-tested that low in mid-1992 and by 1993 it was in a firm uptrend. However, as the Nationwide data shows, after the crash of 1989-90, the UK housing market didn't make its final low until 1994-6, by which time Barratt had long since broken out.
As you can see, Barratt saw some volatility in the late 1990s, coinciding with the Asian crisis. It weathered the dotcom bust in 2000, then alongside the other UK builders, it really began to take off, before finally peaking in February 2007. This was some six to nine months before our housing market peaked in summer-autumn of the same year.
So the house-builder stocks – and it wasn't just Barratt, but Persimmon, Bovis and the other majors too – anticipated the housing market. (I would like to thank the trader Michael Hampton of www.globaledgeinvestors.com for first alerting me to this invaluable leading indicator).
report from MoneyWeek magazine: When will house prices bottom out - and how will you know?
- Why UK property prices are going to fall 50%
- When it will be time to get back in and buy up half price property
Now, if we look at the more recent stock action of the builders, we can see that they made their low in late 2008, and began creeping up after that. In March, things began to accelerate, and Barratt broke up. But it wasn't until several months later that the reports of revitalised activity in the housing market filtered through, and house prices began to tick back upwards.
Why the housing market is about to turn down
So why do I think the housing market may be about to turn down once again? Quite simply, because the builders have turned down. The stock market made a high on 23 September and then a higher high on 15 October. The builders, however, appear to have put in a top on 9 and 10 September (see chart below – I've added Persimmon (LSE: PSN) (green line) and Bovis (LSE: BVS) (blue dotted line)), and have been gently establishing a downtrend ever since. It is still early days, but that does not portend well for the housing market.
On top of that, Barratt announced a rights issue. The fundraising was announced as the group reported a loss of £486.6m for the year ending June 30, compared to a profit of £86.4m a year earlier. Gulp.
Alastair Stewart, analyst at Investec Securities, said he suspected that Barratt would use the funds to reopen existing sites rather than buy more land. He continued to rate the shares as "sell".
"We believe that further writedowns could follow after an issue and that Barratt and others [in the sector] could be back to the market in the mid-term for further equity issues, since balance sheets remain under-strength to fund genuine growth." In other words, they still have too much debt and still aren't making enough money.
It's not just Barratt. Rival builder Redrow has also announced a rights issue. These companies are to be commended for raising money while the market is strong. But, as Michael Hampton says: "The big fund-raisings and price erosions in builders' shares should be a clear sign that all is not right in the world of UK new home building".
Normal practice has resumed - that's cause for concern
So any former housing bears who are considering throwing in the towel at the strength of this rally in housing should refer once again to Jean-Paul Rodrigue's 'Main stages in a bubble' chart (see below). In fact, every investor should blow this chart up and put it on their wall.
House prices are rising once again, bullishness is back, estate agents are running low on stock, and the practice of gazumping has returned. In other words, 'normal' practice has been resumed. Look at the main stages of a bubble above and see what happens shortly after things 'return to normal'.
No indicator is 100% reliable, of course. The builders have made misleading breaks before - such as in 2002 and 2006. But I reckon that the next leg down in housing is just a few months away. Perhaps we'll start to see it as those ultra-cheap tracker home loan deals start to expire and monthly repayments start to increase.
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