This is, of course, the question that everybody wants to know the answer to. So let’s put all the evidence together and work out what it tells us...
In deference to Donna Summer, my favourite diva, the housing industry has experienced its version of Spring Affair right down to “ooh the feeling’s getting really strong, gives me the strength to carry on … ”. But now Easter is over are we facing Summer Fever?
Companies remain cautiously optimistic and the stock market seems to believe it has bottomed out, if the share price movements of Taylor Wimpey (+250%), Barratt (+112%) and Persimmon (+55%) are indicative. Investors like nothing more than a cyclical rise in a bombed-out sector, and now we’ve had a “normal” seasonal upturn there is a sense that the housing market has finally troughed. But do recent trends constitute a short-term phenomenon or a basis for sustained recovery? Let’s examine the evidence:
- Improved sales rates. Clearly sales rates have improved from the pitiful lows recorded in the second half of last year and evidence suggests the return of the spring uplift (that is, 20-40% higher than autumn). Interestingly, all major housebuilders have cited rising first-quarter sales rates, on average 20% by early March accelerating to 25% in early April. However, few have experienced higher volumes than a year ago, and remember, these were woefully depressed. So let’s keep a sense of perspective; it is better now than last year’s dire figures but nowhere near recovering to standard sales rates.
- Pricing stability. Talk from the front line is that housebuilders have held prices stable this year; the fact that sales rates have improved at the same time encourages a virtuous circle. Yet official statistics continue to indicate decline, with the notable exception of Nationwide’s March index, which cited a 0.9% price rise and in so doing sparked much heralding of the cycle turning. The fall in prices is a reflection of transactions in the secondhand market (which are more than 85% of total transactions). Sales volumes may yet require renewed impetus and price continues to be housebuilders’ preferred mechanism. Thus, another round of competitive pricing cannot be discounted.
- Interest rates and affordability. Much is made of improving affordability, and understandably so. Suffice it to say that if selling prices have fallen 15-20% in tandem with the base rate falling to a post-war low of 0.5%, then technical affordability falls below long-term averages and may be one of the main factors driving demand. I hope that isn’t true. Affordability can’t really get any better, can it? Base rates cannot go lower and with unemployment rising daily, wage inflation will trend to zero. This means affordability can only improve measurably if selling prices drop. That may rekindle demand but would send housebuilders deeper into loss, some terminally so, perhaps.
- Mortgage availability. This appears to have bottomed and the last quarter has seen consecutive monthly increases, but approval levels are still pathetically low. Moreover, mortgage providers remain severely restrictive and generally lending-averse: few are entertaining anything less than a 20% deposit and surveyors are consistently down-valuing. I still believe we’re 6-12 months away from a banking system that can supply enough mortgages to support significant increases in demand. This remains my biggest worry.
- Sentiment. This is the great intangible. Recent surveys, such as those by the RICS and Rightmove, offer hope and anecdotally I sense it is improving; consumers still believe in housing and corrected prices are throwing up opportunities if not absolute bargains. If accessible, cheap funding is a positive, too. The negative is rising unemployment and its broader impact on confidence. History tells us that fear of unemployment is less negative than, say, pricing trends or affordability – some relief since I expect unemployment to rise through to 2011. Overall economic health and positive or negative media commentary are bigger influences on the potential homebuyer, in my opinion. So here, the jury is still out.
In summary, I expect the spring surge to level off over the summer but the industry should sell at or above the comparatively low 2008 levels for the remainder of the year. Autumn could be a testing period for price stability if demand wavers but I expect any competitive down-pricing to be a final round of pain as the industry completes a de-stocking cycle and fills shrunken forward order books. I expect annual sales rates for 2009 to be 10-15% higher – off a very low base – and to press on 5-10% in 2010. Those forecasts, if vaguely accurate, prompt another question. When will the industry reinvest in production and stock to supply that demand? That’s another story, and as Donna so rightly says: Heaven Knows.
Kevin Cammack is an analyst at Cenkos Securities.