… sang Karen Carpenter in the early 70′s chart-topper. And it could make a comeback as an unlikely signature tune for the UK housebuilding sector.
That’s the view of Alastair Stewart, anyway.
The Dresdner Kleinwort analyst – and housing uber-bear — published his predictions for 2009 on Thursday and in the words (almost) of another number one single: Things can only get better bleaker.
So bleak in fact that:
Housing starts will hit their lowest peacetime level since 1920.
Peak to trough house price fall will be 50%.
Several private and quoted housebuilders will face administration.
Here are some selected highlights from the note, starting with that Carpenter reference.
Housing in general and over-geared housebuilders in particular will lurch from crisis to catastrophe during 2009 and possibly well beyond, in our view. Housing transactions are crashing to post-war lows and we believe new starts will hit the lowest peacetime level since 1920. Some brave souls are predicting a recovery this year. We concur with the late Karen Carpenter: “We’ve only just begun”.
The most bearish forecasts for house prices is a peak to trough fall of about a third but the futures market appears to be pricing in them halving. We veer to the latter view. But volumes (or lack of them) rather than falling prices will be the real body blow for distressed housebuilders in our view. Most volume housebuilders have moved over to “more appropriate” cash flow covenants. The problem is … to generate cash you need to sell homes (not merely to stop buying land).
Housing starts will fall below 60,000 this year, we believe – the worst since the 29,700 completions in 1920. The most cash strapped developers, we understand, are fighting to sell stock and work in progress at almost any price. On consented land selling prices often barely cover build costs, suggesting residual values are at negative land values. Our industry sources suggest many developers are also doing anything in their power to scupper planning consents, which can trigger payment demands.
We do not buy into the much voiced hope that volumes will return when inter-bank lending increases. The market has gone too far for that, in our view. Buyers can get real bargains now, we are told. The only problem is: they generally assume they can get greater bargains the longer they stay out of the market. Those that do want to buy – and can get a mortgage – are increasingly finding surveyors are providing valuations so low that they scupper not only their purchase but several in each buyer chain. The impact of down-valuations can be seen in the latest Home Builders Federation survey below.
A vicious circle is developing, we believe. The more that properties are down-valued in the “mainstream” new and second hand market, the less that valuers will see comparable transactions for future valuations. In this case, developers’ fire sales, auctioned repossessions and panic selling by investors (all mainly apartments) will increasingly become the only comparable local transactions for surveyors to base their view on, forcing valuations down further and further scuppering the mid market. We believe the eventual outcome will be even greater carnage, with many private and even quoted companies facing the risk of administration.
Related link:
UK house prices – nearly where they should be – FT Alphaville