January 22, 2013 11:31 pm

Housebuilders enjoy state-backed boom

Five years ago, Britain’s housebuilders were struggling to survive. Home sales had halved and land values were plummeting. Now, a 1930s-style state-backed building boom is seen as the panacea for an ailing economy – and the country’s biggest housebuilders are reaping the benefits.

David Cameron, the prime minister, has spoken of “getting Britain building” – with business secretary Vince Cable championing new-build programmes as a way to get real demand into the economy quickly. Planning minister Nicholas Boles has suggested countryside twice the area of Greater London should be covered in houses.

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If words translate into action, it could boost an industry that has already been buoyed by government efforts to stimulate construction and mortgage lending.

At the largest-listed housebuilders, almost a fifth of sales has been supported by government schemes, such as FirstBuy and NewBuy. And the Bank of England’s Funding for Lending scheme has encouraged banks to advance cash to homebuyers, and slightly to improve mortgage availability.

Largely as a result, the FTSE housebuilders subsector has risen 46 per cent in the past six months, despite stagnant UK house prices. Companies such as Barratt, Taylor Wimpey, Berkeley and Redrow have been delivering record increases in profits, with earnings up 40-50 per cent in the past year.

Noble Francis, economics director at the Construction Products Association, said housebuilders would suffer if the government were to squeeze its stimulus – but “that’s not going to happen”.

Funding for Lending is expected to continue until 2014. The government has recently injected a further £280m into FirstBuy, which reduces mortgage rates for first-time buyers. For investors, the question is the extent of the housebuilders’ reliance on schemes to sustain new-found profitability.

Arguably, much of the hard work to turn their businesses round had already been done.

Although housebuilders were badly affected during the financial crisis – with smaller companies going bust and listed groups forced to raise more cash and write down land values – they were also able to exploit falling prices to buy land cheaply.

According to Knight Frank, land prices fell by as much as 60 per cent from the peak of the boom in 2007 to the end of 2009. It prompted many to gamble on a recovery.

Galliford Try, for example, raised almost £120m to buy land at distressed prices.

The bets have paid off. Even so, housebuilders have stayed focused on profitability rather than sales. They have built more lucrative family homes rather than apartments, targeted London and the southeast, and built on land bought at the lowest prices.

That has delivered sharp growth in margins: from about 9 per cent to 11 per cent last year.

They continue to buy land, as well. Barratt, for example, is buying at its fastest rate ever. Between them, the listed housebuilders have an average of five years’ worth of land in their banks.

But profitable housebuilders do not necessarily deliver government objectives.

Housing starts fell 10 per cent last year – to less than half the 263,000 homes a year needed to match demand. Smaller and medium-sized builders still suffer.

It has inspired accusations of land hoarding. Kate Houghton at Campaign for the Protection of the Rural Environment, says: “We understand that housebuilders need a pipeline of sites behind them and that they have a business to run.

“But, equally, if they have development permission, they should be concentrating on getting houses built.”

According to the Local Government Association, there are 400,000 plots with planning permission awaiting development.

One problem is that housebuilders are essentially land traders so, when plot prices are expected to rise, they have little incentive to develop land.

“The major housebuilders are not going to double the number of units they build because it’s not in their interest,” says Mr Francis.

“It would halve land values and margins. If they built too fast, it would reduce the sales price – and they are unlikely to do that.”

The biggest hindrance is still mortgage availability. Aynsley Lammin, analyst at Citi, says housebuilders will increase volumes but only as the market and mortgage availability allow.

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