NOW is a very good time to be a large housebuilder. Hundreds of billions of pounds of cheap funding for lenders, ultra-low interest rates and generous taxpayer-backed schemes to help first-time buyers get on to the first rung of the property ladder. It’s the stuff that recoveries are made of.
Take Persimmon, the largest housebuilder in Britain by market capitalisation. This proud Yorkshire business – it is one of only two FTSE 100 constituents in the region – has been playing a vital role in the economic recovery.
In the first six months of the year, legal completions increased 28 per cent to 6,408 new homes sold, with the average selling price up 4.3 per cent to £186,970.
This helped revenues rise by 33 per cent to £1.2bn. Importantly, pre-tax profits rose by 57 per cent to £212.9m.
Persimmon has entered the traditionally slower summer trading weeks but private sale reservation rates are ahead of last year and forward sales from July 1 are running at £1.53bn, 22 per cent ahead of the same period in 2013.
The results cover a period when new rules for lenders on checking whether borrowers can afford their loan – the Mortgage Market Review – have been introduced. Nationwide Building Society said these had had some effect as its lending fell.
But Persimmon chairman Nicholas Wrigley said: “We anticipate that mortgage lenders will continue to actively develop their participation in the UK mortgage market over the medium term.
“We welcome the continued discipline of mortgage lenders against the backdrop of the ongoing improvement in the UK’s wider economic performance which is supporting increased confidence in our regional markets.
“Disciplined lending in support of a keen appetite to purchase newly-built homes from both first-time buyers and existing homeowners provides the opportunity for the housebuilding industry to increase construction activity.
“Whilst we remain vigilant about the continued challenges facing our markets emanating from events both at home and abroad I remain confident of Persimmon’s continued successful development.” The company deserves to be where it is. It took some tough decisions quickly in response to the downturn and had to let a lot of staff go. In all, 2,000 staff were shown the door.
Persimmon also paid down all of its debt, reducing a massive £1.6bn debt pile to zero by ruthless management of cash.
After battening down the hatches, the business acted shrewdly to start buying up cheap land. Prices had fallen dramatically. Size matters: smaller housebuilders are still finding it hard to access bank funding so Persimmon faces less competition for assets, which helps keep prices down.
So far so good. Challenges remain though, not least in the planning system which is still infected by Nimbyism in spite of some meaningful Government reforms to speed up the process.
There is also the question of interest rates. As and when they do rise, what impact will that have on the ability of homebuyers to access affordable mortgages?
Mike Killoran, finance chief at Persimmon, was in confident mood when Blackfriar caught up with him yesterday.
He said: “Competition in the mortgage market will make sure that mortgage rates do remain competitive and affordable even if central funding costs do increase a little bit.”
Mr Killoran said lenders are factoring in an increase of 300 basis points – that’s three per cent – before approving applications.
He highlighted the continuing importance of the Government’s Help to Buy scheme, which helps first-time buyers bypass the need to spend years saving for a hefty deposit. Fortunately the Government has extended that scheme from 2016 to 2020.
The existence of the scheme serves as a reminder of the dysfunctionality that lies at the heart of the UK housing market, a market in which new entrants need state support to join.