Housebuilders have received a massive injection of confidence from government, but like any drug fix the good times cannot last long
Happy days are here again. Or so it would seem. Construction output for Q2 over Q1 was revised upwards last week from +0.9% to +1.4%. House price inflation (the nearest thing to legalised Ecstasy tablets for most Brits) has returned with a vengeance. Companies – especially housebuilders – are beginning to talk about labour and material shortages. And the nation’s (or at least the southern part of the nation’s) feel good factor was further enhanced by England’s trouncing of the Aussies in The Ashes.
A cue for unbridled rejoicing? Not necessarily. The first doubt to arise is how solid is this recovery? Not very, many are arguing, certainly in the housing sphere. The housing market may have got off the blocks quicker this year than a Jamaican sprinter, but mortgage lending and housebuilding companies have received more performance enhancing stimulants than ever was doled out to East German shot putters.
The Bank of England’s Funding for Lending scheme was the equivalent of a gigantic dose of steroids for the mortgage market, but the problem was it took a long time to get pumped round the system. Just when it was about to kick in, however, a panicky George Osbourne, mindful cynics would argue of a looming election, in April administered a further injection of concentrated Red Bull in the shape of the first phase of Help to Buy (equity share loans for new homes) with a top-up of crack cocaine due in January with the onset of H2B2 (state guarantees underpinning 95% loans for homes in the wider second hand market).
The Bank of England’s Funding for Lending scheme was the equivalent of a gigantic dose of steroids for the mortgage market
The government believes this will boost housebuilding volumes. It probably will, but only a bit more than they had planned already. Far more likely is the historic pattern of rises in funding fuelling house price inflation and land prices more than building starts. But, like all drug fixes, the effects are temporary. The probable finishing line is April 2016, when H2B2 is scheduled to run out, conveniently just beyond the election. Then it is likely to be the case of whither mortgage lending volumes trend house prices follow. By which time it is almost inconceivable that interest rates will not be heading up again. For the housebuilders, it is a case of making hay – and profits – while the sun shines.
In the wider construction sector, the issues are the economy (to a great extent reflecting the housing market) and public-led investment. The travails of HS2 highlight just how slow governments of either stripe are at getting major infrastructure projects out of the ground.
But, even if the wider construction economy does, as it were, have legs, another concern could present itself to contractors and their supply chain. Painful as the litany of company failures has been over the past couple of years or so, it could have possibly been worse. But, to invert the Bob Dylan lyric, “the darkest hour is just after the dawn”. Past boom and bust cycles have shown insolvencies often picking up when cash starts flowing around the system again … when there is a bit more flesh for creditors to pick off the bones of emaciated companies.
For companies in both the housebuilding and non-housing sectors, the political reality and historic precedents suggests not over-extending on the basis of short-term euphoria.
Alastair Stewart is a construction analyst at Progressive Research