What housebuilders' share prices say about the property market
By
Dominic Frisby Dec 16, 2009
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Housebuilders point to a fall in the property market
Get set for the next leg down in the housing market.
It's right around the corner. A number of leading indicators, including auction prices, housebuilders' share prices, and buyer inquiries, suggest that this year's rally is already petering out.
And the downturn could get nasty…
Why 2010 will be a grim year for property
I have written before about how the performance of the house builders' stocks such as Barratt and Taylor Wimpey can tell you which way the housing market is heading (Watch out: the housing market is about to turn back down).
Both here and in the US, they led the housing market up through the '90s and '00s. Then, by between six months and a year, they led it down again in the latter part of the decade.
In early November I noted that, despite the fact that the stock market continued to rally through September and October, by early September the rally in the builders' stocks had stalled. If that peak was not challenged, I suggested, we might start to see signs of the next leg down in housing within just a few months.
The stock market has continued to rally into December. But that late-August / early-September high in the builders has not been even slightly tested. In fact, the builders have been falling.
And now, right on cue, we are starting to see signs that the momentum in the housing market's recent rally is starting to fade.
First let me show you a chart of the builders since August. Taylor Wimpey (orange), Berkeley Group (red), and Bovis (yellow) all made their highs for the year in late August. Barratt (black) and Persimmon (blue) followed in early September. Since then they are markedly lower.
Now let's look at some of the signs of falling momentum in the housing market itself.
First, asking prices are falling. Recent data from Rightmove shows that asking prices this month have fallen by 2.2%. That's the third month in a row of falling prices. This is despite estate agents reporting the lowest average stock for sale in 21 months. Even the supposedly invulnerable high-end property market has been hit, with asking prices in Kensington and Chelsea down 5% this past month. With London driving this year's house price gains, a loss of momentum in the capital would, surely, have a national impact.
With interest rate cuts no longer an option, what weapons remain for the government to prop up the market?
There are many other signs of a slowdown
There are other signs of falling momentum too. The rate of growth in new buyer inquiries is slowing, according to yesterday's Royal Institution of Chartered Surveyors (Rics) housing market survey. Since a high of 66% in June, the net balance of surveyors reporting rising, rather than falling inquiries, has declined, reaching 28% in November.
Action over at the auction houses also indicates a faltering rally. The Fathom/Zoopla Auction Price Index for November showed that the median auctioned property sold at a discount of 22% to the conventional market, up from 18% in October.
There do seem to be more mortgage products coming to market, but lending is still tight. For example, First Direct's heavily-touted new tracker mortgage looks to be a very appealing product, but it requires a 35% deposit. On the average Nationwide home (costing around £160,000), that means the buyer has to stump up some £56,000 in deposit. That's a lot of cash for the average UK home buyer to come up with, particularly in a recession. And he better make sure he has a good credit history.
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But the real threat is higher interest rates
But the real threat to this house price rally is lying in wait further down the road. It's higher rates.
There has been a surprisingly low level of forced selling so far in this recession. This is due both to low repayment rates on mortgages, and as Melissa Kidd at Lombard Street Research puts it, a certain amount of "forbearance" on the part of lenders. This has kept the supply of property to the market down. But with prices stabilizing, as Kidd points out, how long will this "forbearance" last? If lenders start to think they can recoup their costs on repossessions, they might be less understanding of people who have run into payment problems.
Meanwhile, there has been demand for housing from buyers with good credit histories and healthy deposits, which has kept prices up. But the supply of such buyers is not inexhaustible. There is a far greater supply of people just managing to get by thanks to low rates. If asking prices are already falling on current low inventory levels, what will happen when the supply of houses for sale goes up?
Some of the threat lies in 'discount tracker' rate mortgages negotiated pre-credit crunch. Many of those who negotiated mortgages three to five years ago are now paying far less on a monthly basis than they would need to rent the equivalent home. You might have heard of the couple with a £200,000 discount tracker mortgage who are paying nothing. Cheltenham and Gloucester even offered a mortgage at more than 1% below the base rate. Those in this situation will not want to sell out of property (and pay higher rental costs, why would they?); nor will they want to move up the property ladder and face the higher costs of a new mortgage. So they are staying put. This, also, has contributed to the lack of supply to market.
What happens when rates go up?
But what happens when rates go up, be it because of mortgages resetting, or the Bank of England bumping up base rates? Some will be able to handle it. Some will have saved for the event. But others won't have.
Of course, it 's possible we could be in this low interest environment for many years to come. Raising rates is not something the Bank will do lightly. But the coming year will be tough one. On the one hand, inflation is rising. The Bank had expected this, but it will start to look bad if inflation continues to rise and rates are kept at current levels. And on the other hand, thanks to our excess debt levels, general borrowing costs may be forced higher across the economy as investors refuse to buy government debt without getting a far better yield on it.
Even with just slightly higher rates, we could easily see a scenario which is the reverse of today: just as today's inventory levels are 'artificially' low, for the reasons explained above, tomorrow's inventory numbers could quickly become 'artificially' high as people rush to sell. What price the average house then?
One thing's for sure, investors in house builders' stocks have already decided that the best of the rally has come and gone. And if history is anything to go buy, we'll soon see that reflected in the wider housing market.
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Dominic Frisby
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