Doubts build in housing sector

SHARES in housebuilders have more than doubled in two years as home prices have recovered, but an uncertain interest rate outlook and rising costs mean gains look more modest – and more precarious – in 2014.

George Osborne

Government schemes, including the Help to Buy programme, which guarantees up to 15 per cent of applicable mortgages, helped push house prices to an 11-year high by one measure last month, fuelling concerns about a potential bubble that could burst when interest rates eventually rise.

House prices will rise on average by four per cent this year and 5.5 per cent next and even more in London, according to one recent poll of market watchers.

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Chancellor George Osborne has played down talk of overheating and asked the Bank of England for annual recommendations on the impact of the Help to Buy, starting in September 2014.

Housing is a politically sensitive issue. Home ownership is widespread, and rising or falling house prices are a major factor in consumer confidence. Critics say the Government schemes are designed to prop up prices before a general election due in 2015.

There are signs the rally in housebuilders is losing momentum, with negative bets on the sector doubling in the past four weeks, while monthly net sales of real estate funds domiciled in Europe – including the UK – fell 70 per cent in September from a year earlier, according to Lipper data.

“As a sector, they had an extremely good run, but they are likely to take a breather. I am not encouraging people to pile into them,” said Tom Gidley-Kitchin, an analyst at Charles Stanley.

“I am not hugely positive, but also don’t think that the market is going to crash over the next couple of years.”

The UK Homebuilding Index has surged 50 per cent so far this year after a 64 per cent jump in 2012, but fell five per cent this month after hitting a record high in October. It has dropped in four of the past six months.

Markit data shows stock lending in the sector doubled over the past weeks, indicating an increase in short positions – a strategy under which investors sell borrowed stocks in anticipation of a decline in the price, hoping to buy back more cheaply later and pocket the difference.

Among the risks for the sector is the possibility that UK interest rates could rise sooner than expected as the economic outlook improves and the job market recovers.

Higher rates don’t just make mortgages more expensive, they also curb demand and prices for homes and shrink housebuilders’ margins.

Analysts said that, although UK interest rates were not likely to rise before 2015, continuing speculation about the timing of such a move would keep investors and home-buyers nervous.

The Bank of England this month cut its inflation forecasts and said unemployment could fall much more quickly than it previously thought to the seven per cent level, at which it would start to think about raising interest rates.

Houebuilders also face a rise in the costs of land and building materials as increasing demand exceeds supply, putting pressure on their profit margins.

Analysts said shares in housebuilders were expected to rise further in 2014, albeit more slowly than in the past two years. They predicted at best 10 to 20 per cent gains next year.

“I would be cautious in buying homebuilders and feel the market is a bit toppy,” Commerzbank economist Peter Dixon said.

“It might be a good place to be, but not for too long. You have to make sure you pull your money out at the right point.”

The sector, which shrank sharply to survive the property downturn after the financial crisis, faces rising costs on top of long-standing difficulties in getting projects approved under strict planning rules.

Barclays started coverage on the sector this month with an “underweight” on Bellway and Bovis Homes and an “equal weight” on Berkeley and York-based Persimmon, the UK’s largest housebuilder. It is, however, broadly positive on the sector and is “overweight” on Barratt Development and Redrow.

It is not just the builders that have benefited in the boom. Analysts said companies such as property website Rightmove, which has surged 70 per cent to a new high this year, could also feel the pinch of any housing market weakness.

Some analysts also said it was too early to say if the UK property market was overheating.

“The Government’s support for UK housebuilders is very helpful. They have a good few years to go and make decent returns,” said Charlie Campbell, property analyst at Liberum Capital.

“But you are not going to have another year of 60-70 per cent growth in their share prices.”

Earlier this month, Persimmon said that visitor levels to its sites between July 1 and November 5 were 20 per cent higher than a year earlier. It said selling prices remained “firm” in all its regional markets and it had recently increased build rates to meet surging demand.

But Persimmon said it had yet to see any benefits from the second phase of the Government’s Help to Buy scheme.