Why Build Houses If The Mortgages Aren’t Available?

Given that the number of mortgages approved in March was down by almost half on last year, you might have suspected that things had gone a bit quiet for Britain’s housebuilders.

But investors were still taken aback by the gloom that enveloped the sector yesterday.

Persimmon, the country’s biggest housebuilder, revealed that sales were down almost a quarter in the first four months and that in the past three weeks, normally among the strongest of the year, they had fallen further.

Mike Farley, Persimmon chief executive, blamed the tightening in the mortgage market saying that for the first time in his memory there were simply not enough mortgages for the houses available.

There doesn’t seem to be much point building houses if potential buyers can’t finance their purchase. So Persimmon has decided not to start work on any new sites until there are more mortgages.

Unlike in India, where housebuilders have started giving away cars to drum up business, their British counterparts have, so far, resisted the temptation to offer big discounts. If others follow Persimmon’s lead by cutting production, it could help to prevent the downturn in house prices from turning into a collapse.

But Persimmon shares tumbled and rival Barratt Development’s fell even more on speculation that it will launch a rights issue.

Mr Farley called on the Government to scrap stamp duty for first-time buyers. But this sounded as if he was just going through the motions. If there isn’t mortgage finance around, stamp duty is really neither here nor there.

Despite the Bank of England’s move to pump liquidity into the system last week, there is no sign of mortgage conditions easing.

Even if things do improve, Mark Hake, at Merrill Lynch, doubts that it will bring much short-term respite.

This is because there is growing evidence that potential buyers are postponing purchases in anticipation of further price falls. Housebuyers are also nervous about the possibility of losing their jobs.

John White, Persimmon’s chairman, went as far as to say that present conditions were possibly even worse than in the early 1990s.

That is surely going a bit far. Apart from the state of the mortgage market, which will not remain frozen for ever, the industry faced bigger problems in the early 1990s. In particular, employment remains robust with the number of people claiming jobless benefit at its lowest level for more than three decades. Unemployment is about half of what it was during the worst of the last housing recession.

Houses are still more affordable, in terms of the mortgage payments as a percentage of disposable income, than at the peak of the last cycle.

The number of new houses being built is lower than in the late 1980s, while demand has been underpinned by strong growth in new households and immigration.

Unless the Government curbs immigration, which seems unlikely, or relaxes planning controls, which is equally improbable, the medium term outlook for supply and demand looks healthy for the housebuilders.

A further plus this time is that the industry is much more concentrated and is likely to be more disciplined, in terms of price and volumes, than it was in the 1990s.

Indeed there must be a chance that it becomes more concentrated still as the sharp falls in share prices make some of the smaller builders attractive to the likes of Persimmon.

But, just like its potential house buyers, Persimmon might be well-advised to wait for prices to fall further.

david.wighton@thetimes.co.uk

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