Crisis? What crisis?!
Results from the listed home builders this summer describe a sector in rude health, particularly in the mid-market house price range of 250k-350k. Redrow for example reported sales up 21%, PTP up 26%, EPS up 27%, DPS up 70%, and ROE up to 28%. And this has not been at the expense of operating margin (up 50bp to 19.4%) or higher leverage (gearing 6% and falling). On a larger scale both Barratt and Persimmon set out similar market conditions of buoyant demand, modest build cost inflation, good availability of land and benign land price inflation. Even the planning system came in for less bashing than usual! And investors would appear comfortable with this Goldilocks environment with listed stocks up 25%-50% in the last 12 months, trading on 1.5x-3x book value.
Criticism of the home builders has come from commentators who see the sector as maximising profits and return on equity rather than maximising new housing supply – but when I last looked boards of listed companies have a fiduciary duty to their shareholders! The Bovis turnaround, with the new CEO cutting his housing targets and promising a return of capital, helping to re-rate the shares, further illustrates the point. Critics also point to the government’s Help to Buy scheme (c.35%-45% of sales for the majority of home builders) as fuelling the demand-side while doing nothing for new supply. The latter point is well made, but Help to Buy was a legitimate scheme post-GFC to help stimulate the economy and jobs, but critics should be under no illusion – phasing out Help to Buy post-2021 will not increase new housing supply!
The numbers are improving: the Q2 DCLG housing stats show completions of 40,310, up 15% y-o-y, or 153,330 for the 12 month period, up 11% y-o-y. This is not far off the levels of completions pre-GFC and 60% up on the market trough in 2013. That’s not bad progress for a ‘broken’ sector. So what exactly is the crisis?