JayJust when you thought the UK housing market was about to calm down after the euphoria of 2021, it turns out that buyer appetite continues to grow, even in the worst of days. The UK housing market saw its strongest January in a decade and a half – its fastest growth rate since 2005. According to Nationwide the annual price increase reached 11.2% and the average home price reached £255,556.
This is all music to the ears of the UK’s biggest housebuilders – many of whom are reporting 2021 results this week – and should have paved the way for bumper profits.
The boom has seen Persimmon, Taylor Wimpy and Wistry (formerly known as Bovis Holmes) bank high profits as they have been through more than a decade of ultra-low interest rates, central bank enthusiasm and aid from the Treasury generously. benefit from. Project. What, if anything, could be stopping their winning streak?
Well, the events of last week, coupled with the broader stock market volatility since the start of the year, may give some pause for thought. Despite rising sales, housebuilders have not been on the investors side in recent months. Shares of Persimmon and Taylor Wimpey are down about a third from the highs they saw last April, and it’s a similar story in Wistry.
And shareholders have a right to be cautious. The reduced cost of living is reducing the spending power of households, which continues to confuse central bankers. As energy, fuel and food prices outpace wages, there is a growing risk that it will flow into the housing market. Rising interest rates may dampen ambitions, although mortgages are still incredibly cheap by historical standards. Worse yet, there is a risk of a solid global recession, exacerbated by Russia’s invasion of Ukraine, that could undermine already faltering consumer confidence and home purchases.
Then the homeowners themselves face the rising cost. The construction industry has been battling high costs as supply chains were disrupted by the pandemic, although by far the biggest players say the costs have been more than offset by rising home prices. It’s not just the price of materials rising: As in many sectors, workers are demanding higher wages amid ongoing staffing shortages.
All of this can shrink margins for homebuilders, who report that the shortage of bricks—which can name its price—and long lead times on the material are eroding profits and damaging efficiency.
According to city analysts, there is also the question of who pays to repair the cladding scandal, which is likely to become a hot topic again. In recent weeks, ministers have given details of how the government plans to build developers in England, as well as how manufacturers bear the cost of replacing the dangerous cladding. Developers must commit to a £4bn scheme to fix this on low-rise flats. Ministers have also threatened a “cladding tax”, which would be set at 4% of any pre-tax gains exceeding £4m.
Meanwhile, the government intends to phase out its Help to Buy scheme – a £29bn subsidy for first-time buyers – in March 2023.
It means a baptism of fire for Taylor Wimpey’s new boss, Jenny Daly, who takes over from veteran chief executive Pete Redfern in April.
Over the years the housing market seems to be increasingly detached from reality, with prices reaching ridiculous multiples as well as sky-high profits for home builders. But they may be about to come back to earth.