Double trouble for UK house prices? | FT Alphaville

Double trouble for UK house prices?

More bad news for Britain’s housebuilding sector.

Here’s Howard Archer of IHS Global Insight, reflecting on Monday’s bank lending figures:

The British Bankers’ Association (BBA) reported that mortgage approvals for house purchases sank to an 18-month low in September. Specifically, mortgage approvals amounted to just 31,104, which was down from 31,781 in August and a peak of 45,498 last December. Mortgage approvals were down 26.0 per cent year-on-year and were substantially below the average monthly level of 58.871 seen since 1997.

Meanwhile, net mortgage lending moderated to £1.6 billion in September from £2.5 billion in August. It was also well below the monthly average of £2.2 billion over the previous six months.

Which looks like the much hoped-for uplift in sales from the autumn selling season is not going to materialise.

Of course, the BBA report doesn’t tell us anything we don’t know already. Last week’s leaked Home Builders Federation survey exactly spelled out the dire state of the UK housing market. The survey’s considered the most authoritative one out there by the industry. As the FT reported:

The latest report, seen by the Financial Times, shows the number of deposits on new homes during the first four weeks of the autumn were 14 per cent below the corresponding period in 2008, when the market was badly hit, and only half 2007 levels.

In the four weeks to mid-October, the total net reservations were 2,764, compared with 3,244 for the four weeks in 2008 and 3,561 during the same period in 2009, when house prices were recovering strongly. The four-week total was 45 per cent below the 5,007 reservations made during the same period in 2007.

So, what chance a double dip in house prices and land values?

According to Alastair Stewart, analyst at Investec Securities, the answer is high. On Friday, Stewart lowered his target prices on the all the mainstream housebuilders because of gathering evidence that the housing market has ground to a halt:

We downgrade all our target prices for the mainstream housebuilders to reflect what we see is the serious risk of a double dip in house prices and land values. This has been prompted by gathering evidence over recent weeks that the housing market has ground to a standstill, crystallised by Bellway’s negative commentary on the market at its full year results. We downgrade all our Buy ratings after a review of our inferred NAV land bank methodology.

Stewart says the immediate catalyst for his downgrade was Bellway’s gloomy commentary in its recent result presentation, which indicated that the housing market has deteriorated markedly in recent weeks.

From the FT:

Bellway warned that the autumn selling period had not delivered the anticipated pick-up in home sales, as buyers remain cautious ahead of the government’s review of public sector spending.

Bellway, which on Tuesday reported a swing back to pre-tax profit for the 12 months to July 31, also said the slower than expected trading meant it was lowering its sales targets for 2011. The country’s fifth-largest housebuilder by market value had expected to increase volumes by up to 10 per cent.

Stewart reckons the slowdown reflects much more than just fears about public spending cuts and the outlook for the economy. It all goes back to lending:

– There is evidence that banks are becoming even tougher in their mortgage lending criteria. In Building magazine on Friday October 15, Redrow chairman, Steve Morgan, said the volume of mortgage lending had deteriorated rapidly in the last few weeks, with lenders refusing to fund buyers they previously would have accepted.

– Stewart Baseley, chair of the Home Builders Federation, told the Housing Market Intelligence conference last week that mortgage restrictions “seemed to be getting worse” and were top of the federation’s list of concerns.

– According to Building, under the terms of the Labour government’s 2008 bailout of the banks, £300bn has to be repaid to the Bank of England next year. Trevor Beattie, strategy director at the Homes and Communities Agency, told the magazine he was very concerned about the issue. He said: “We’ve seen a sharp fall [in lending], but it might turn into a sharper one if we can’t do anything about that missing £300bn.”

– However, housebuilders fear current problems will be dwarfed by the impending reworking of mortgage regulation prompted by the Financial Services Authority’s Mortgage Market Review. Michael Coogan, director general of the Council of Mortgage Lenders, told the magazine that the proposed restrictions on lending would make 51 per cent of current lending impossible, and spell the “end of a golden age of home ownership” if implemented.

As a result, Stewart says housebuilders should be trading at a discount to inferred net asset value, not a premium:

We have reassessed the sector-wide multiple we apply to our “inferred NAVs” in determining target prices – to reflect the perceived risk that open market land values will start to fall again. We previously applied a sectorwide multiple of 1.25x to reflect our view that land values were likely to appreciate over time as the housing market stabilised. Given the gathering evidence we believe that the risk is now firmly on the downside and we have reduced this to a 30% discount.

More on Stewart’s unique methodology in the usual place.

Related link:
Bellway downbeat on house sales hopes – FT