Housebuilders in difficulty

Housebuilding firms are starting to feel the squeeze of rising interest rates. Bovis Homes has warned that if rates continue to rise the housing market could be brought to a grinding halt, and their Chief Executive has called for a halt to rate rises.

The sector saw shares tumble, and over half a billion pounds was lost off housebuilders’ share prices after the warning. Bovis is the first housebuilding company to give a trading report since the most recent interest rate rise last Thursday, when they reached 5.75% for the first time since 2001. Experts still suggest that there will be yet another quarter percent rise before the Bank of England is satisfied that inflation is under control again.

Bovis are unhappy. Chief executive Malcolm Harris claimed that rates are already more than they need to be, and warned that recent rises have already caused stagnation in the housing market. The year’s results will depend on the strength of the market in the selling season of autumn, but reservation and visitor rates are beginning to slow down. Harris voiced concerns about where the Bank’s base rate would end up, saying that consumer sentiment and the whole consumer market would be badly hit if rates went up again. He said that the delay between change and effect from interest rates to the housing market was three to six months so the May rise has yet to have its full impact, let alone last Thursday’s. Harris believes that consumers are already showing caution after the recent rises, and the Bank’s Monetary Policy Committee (MPC) did not need to rush into further action, but should wait for the effect of the latest two rises.

Bovis’s previous profit forecast was for a 10% growth, but analsysts have downgraded expectations fro this year and next by up to 10% in the light of the trading statement and these comments. As a result of that Bovis shares fell by more than 8% to 842.5p and Redrow fell by 4.3% to 517.5p. Taylor Wimpey was down 4%, Persimmon was down by 2.5% and Barratt Developments was off by 2.3%. The sector was worth £20bn at the start of play, but was down by £600, or 3% by lunchtime. Bovis is favourite to build much of the housing needed for the 2012 Olympic Village. In the first half of 2007 it sold 1256 homes compared to the same period in 2006.

Last month merging companies George Wimpey and Taylor Woodrow warned that growing mortgage costs would damage business in the second half of 2007. Those concerns were expressed after the British Bankers’ Association stated that 4% fewer mortgages were approved in May 2007 than a year before. The numbers were 77,443 loan approvals in May 2007 and 80,298 in May 2008. In the same period house prices were up 9%. The slowdown in the housing market was seen after the fourth rate rise since August 2006, but the MPC was not convinced that enough had been done to combat inflation. Taylor Wimpey warned of a less buoyant market in the second half of the year due to the impact of the rate rises and the effect on customer confidence.

Despite the warnings there is still a shortage of housing supply in the UK, particularly in London and the South-East, and this has kept the market warm in recent months. If confidence diminishes here, the market could be in for serious problems in the coming months.

Only ten months ago, in September 2006, Bovis Homes recorded an 18% rise in annual profits as a result of the strong UK housing market. That was just after the first rate rise of the latest round – last August when interest rates went up from 4.5% to 4.75% - the first change in two years. Harris then said that the rise had not dented the housing market which was steady, with comparable reservation rates for 2006 as in 2005. The first half of 2005 saw 1,089 house completions, so it can be seen that the first half of 2007 still compares very favourable with that figure.

Now housebuilders are hit, not only by increasing problems with affordability of the UK housing market, simply down to house price inflation running over 10% compared to regular inflation at 2.5%, but also by the increase in borrowing costs experienced by many homeowners as a result of rising mortgage costs following on from base rate rises.

Prime Minister Gordon Brown is due to announce measures later this week to help youngsters with housebuying, but it has come too late to prevent millions being wiped off housebuilders’ share values. They will be hoping he comes up with some radical measure which may rescue their values and hope that the MPC hold off any more rate rises in the coming months.