I refer to them as the living dead - they can be kept alive but really
they are just ghost companies.
That is the shocking description of the state of many of Britain’s
housebuilders by Alastair Stewart, housebuilding analyst at Dresdner
Kleinwort.
Job losses are soaring, firms are going bust every day, house and land values
are plunging and new-home construction has collapsed to levels not seen
since the 1920s.
Government ministers are starting to panic. Their ambitious plan to see more
than 3m new homes built by 2020 looks dead in the water. And housing experts
believe that government policy objectives such as zero-carbon homes, new
affordable housing and community infrastructure projects – once funded by
private builders – are all under threat.
Later this month a crisis inquiry will be held by the Department for
Communities and Local Government into the impact of the credit crunch on the
housing market.
It will make unpleasant listening. The Home Builders Federation (HBF) is
expected to tell the inquiry that this is a housing downturn of
unprecedented proportions.
The current mortgage famine has triggered a downward spiral of restricted
mortgage lending leading to falling sales, driving down prices and
undermining confidence, which further depresses prices.
In the whole of the downturn in the early 1990s, mortgage approvals fell by
57% over four-and-a-half years. This time, in less than two years since
approvals peaked, they have dropped by more than 75%.
Prices are falling faster than ever before. Statistics from Halifax show that
during the whole of the last crash prices fell 13% from their peak. Since
August 2007 prices have already dropped 14% – and are still falling.
According to the Department for Communities and Local Government, the
previous record annual decline was 10% in 1932.
Dresdner Kleinwort’s Stewart sums up the housing market neatly in one word –
carnage.
The biggest housebuilders have already been forced to write off a combined
£2.7 billion so far this year from their UK assets to take account of the
worsening market conditions – equivalent to their combined market value –
following a stock-market rout in their shares.
Taylor Wimpey, the country’s biggest housebuilder, has seen its shares
collapse from 518p in April 2007 to close at 9.29p on Friday.
Labouring under £1.9 billion of debt and a £1.2 billion pension deficit, the
group is in the middle of complex refinancing talks with its lenders and
bondholders. Last week its new finance director admitted that so far the
talks had been a “tad disappointing”, triggering fresh fears about its
future. The company has even held talks with private-equity groups about a
cash injection.
The shares of its rival Barratt have collapsed from a peak of £12.79 in
February 2007 to 64.5p amid fears about its £1.6 billion debt burden. It
renegotiated its banking facilities in the summer to focus on cashflow
generation – but analysts remain nervous about its prospects if the market
remains tough.
There is plenty of evidence it will. Housebuilders have already stopped work
on building sites because they are struggling to sell homes. The number of
new houses built during the next 12 months is forecast to fall as low as
50,000 to 60,000.
At the lower level that would represent a quarter of the 209,606 homes built
last year and just a fraction of the 404,356 houses built in 1967 – the peak
year for housing construction. Not since 1920, when only 29,700 homes were
built, has output plunged so sharply.
The HBF says that new house building accounts for about 1% of gross domestic
product – and a halving of output would reduce GDP growth by about half a
percentage point. The broader economic impact will be much larger.
As the diggers fall silent and homebuyers continue to stay away, businesses in
the sector are collapsing every day.
According to new statistics from Begbies Traynor, the restructuring expert,
housebuilders, developers and estate agents with “critical problems” have
been emerging at the rate of three a day between August and October. During
those three months companies in trouble have soared by 65% from 180 a year
ago to 298. In construction the situation is even worse: the figure has
risen from 380 to 762 – up 101%.
Housebuilders have closed down sales offices and laid off workers. The HBF
estimates that as many as half the 300,000 people employed in the sector
before the crash will lose their jobs.
The builders themselves are becoming increasingly desperate. Aggressive
marketing is commonplace. At a development of three, four and five-bedroom
homes in Yeomans Meadow in the Lincolnshire village of Navenby, Persimmon
placed advertisements in local newspapers last month inviting potential
buyers to “come down and make us an offer on our last remaining homes”.
It is typical of the kind of ads being placed by housebuilders. According to
Dresdner’s Stewart, some builders are offering properties to bulk buyers
prepared to take several homes off their hands at once for 35p in the pound.
In Manchester he has found evidence of builders slashing their prices 44%.
Builders, including Taylor Wimpey and Barratt, are exploring the possibility
of selling parts of their so-called strategic land portfolios – land that
hasn’t yet got planning permission.
However, residential land values have already plunged sharply and the HBF says
that large swaths of residential land – even with planning permission – have
already been rendered worthless in the present market conditions.
The HBF said that in some cases land can even have a “negative value” – in
other words it would cost more to build a development there than the total
value that could be achieved by selling the homes.
One sector watcher said this weekend that some builders are selling land back
to the people they bought it even though they are getting a third of the
price they paid for it because they are so desperate to sell.
The HBF argues that falling land values will jeopardise affordable and
social-housing development, community infrastructure projects and government
targets to make all new homes zero-carbon.
It estimates that the cost of achieving these government policy objectives
adds as much as £2.9m a hectare to residential development costs. The last
statistics from the Valuation Office Agency in January show that the average
price of residential land in England and Wales (excluding London) was about
£2.9m a hectare. This means that the regulatory costs of just three policy
objectives are equal to the average land value.
The HBF concludes that “policy objectives such as affordable housing, zero
carbon, infrastructure funding and lifetime homes will no longer be
achievable because they relied on being funded out of residential land
values”.
In the 1960s and 1970s between a third and a half of all completions were
social-housing projects – and most were funded by local councils
independently of the housing market or private new housebuilding. The HBF
says that we need to go back to the 1960s model because market-based
delivery in today’s conditions is unviable.
The HBF is calling for government action to halt the housing crisis. It wants
ministers to intervene to restore mortgage lending. It is pinning its hopes
on the Crosby review of mortgage finance – it will be published this month –
to find solutions to end the mortgage drought and bring hope back to the
beleaguered industry.
The HBF is accusing the government and the Financial Services Authority (FSA)
of exacerbating the mortgage famine. It points out that Northern Rock has
been required to rapidly reduce its mortgage book since its state bailout
and that building societies have recorded negative net mortgage lending in
the past few months – in response to the regulatory requirements of the FSA,
the City watchdog.
So far the government has cut stamp duty and made available a £600m funding
package for registered social landlords to buy stock from housebuilders and
facilitate some 10,000 shared-equity purchases by first-time buyers of new
homes over the next two years.
Builders complain, though, that these funds are too slow to respond and it is
quicker to agree a cut-price deal in the market.
The HBF is adamant – firmer action will be needed if a meltdown is to be
averted.
Figures that spell doom
Up to 150,000 jobs could be lost, halving employment in the housebuilding
sector.
The number of new homes built this year is expected to fall to 50,000-60,000
from 209,606 last year.
The biggest housebuilders have been forced to write off £2.7 billion from
their assets. This is equivalent to their combined market value.
