Two weeks after Taylor Wimpey talked of “continued stability” in the UK housing market, it is the turn of its peers to report on the strength of the sector’s foundations. Next week, no fewer than five housebuilders will file half-year trading updates, beginning on Tuesday with Persimmon — the closest to Taylor Wimpey in size.

Whether this quintet will echo its more cheerful tone remains to be seen. But by general consensus, housebuilders have enjoyed a relatively benign few months: a levelling out of prices, falling levels of cancellations and a tentative pick-up in volumes. That most new-build homes are now fully fitted out — a reflection of the prolonged lull that preceded this spring’s selling season — rather than muddy plots of land has made them easier to shift. Helping, too, have been the incentive packages — from stamp-duty subsidies to part-exchange packages — offered by housebuilders to bring in much-needed cash.

Activity in the derivatives market is also encouraging. Earlier this year, the Tradition Future House Price Index — a tradeable forward curve on residential property — pointed to a 20 per cent fall in the 12 months to December. That year-on-year decline has now narrowed to 8.5 per cent.

Housebuilding shares would appear to tell a similar tale. Barratt Developments is up 109 per cent since the start of the year, with Taylor Wimpey ahead a hefty 232 per cent — part of a wider switch into financially stretched stocks whose profits are strongly geared to economic recovery.

So can holders of housebuilding stocks take off their hard hats? Robin Hardy, an analyst at KBC Peel Hunt, thinks not and suggests that the recent shift in sentiment has all the hallmarks of a classic bear market rally. He notes that, against a 25-year trend, housing is still not cheap: the price-to-income ratio sits stubbornly above the long-term average (see chart). Neither does a shift in the price-to-income below the average — something that should soon occur if the current trend is extrapolated — necessarily mark a turning point. On that measure, house prices became “cheap” in April 1992 — but stayed cheap for the next ten years.

There are other considerations, not least the availability of mortgage finance. Between 7 and 8 per cent of Britain’s housing stock tends to change hands each year, implying transactions in about one million homes. But the current illiquidity in the mortgage market — largely caused by the inability to securitise loans — has restricted supply to around 450,000 deals, on Mr Hardy’s calculations. That implies high-street banks must lend materially more than they did even at the 2007 peak of the market to restore the balance.

But perhaps more worryingly, Mr Hardy suggests the development model on which housebuilders’ returns have been based for the past half a century is badly damaged, possibly broken. In short it has relied on buying and holding land, adding value through securing planning consent, keeping a lid on building costs (largely materials and labour) and looking to house price inflation to lift operating margins.

However, Mr Hardy contends that such inflation is no longer a given. Short-time working, pay freezes and unemployment are putting pressure on real incomes — a burden that will only increase if anticipated tax rises to alleviate record levels of government borrowing come to pass. Given that house prices and wages have tended to track each other over the long term — annual rises in both of just over 4 per cent — any fall in real wages is likely to hurt both house prices and demand.

Housebuilders also face persistently high costs. Labour rates may have weakened, but the cost of materials is broadly unchanged. Those overheads mean that in order to match the fall in house selling prices, land prices need to fall proportionately much further if housebuilders’ rates of return are to be maintained. The problem is that at current depressed land prices, there is a lack of willing sellers.

Finally, housebuilders face increased costs through the requirement to comply with tightening environmental regulations that will begin to creep in over the next 18 months or so. On KBC’s calculations, zero-carbon initiatives could add 25 per cent to the total cost of construction over the next six years.

Mr Hardy’s contention is that housebuilders need to adopt a lower-cost, less capital-intensive model — which means not owning land and engineering down costs through embracing a more industrialised form of production, such as the use of mass-produced and pre-assembled materials. Unlike in North America and much of continental Europe, the process of building a house in the UK has hardly changed in centuries.

The traditional response of housebuilders to higher costs has been to consolidate in an attempt to deliver increased economies of scale in land, labour and materials. But such benefits have failed to materialise. Indeed, the current downturn has showed how those companies that have resisted mergers (Bellway, Berkeley and Bovis) have fared better than those that have sought scale — Taylor Wimpey, Barratt and Persimmon. If the sector’s profitability, and valuation, is to be restored, more drastic measures are required.

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