Builders up against wall as housing crisis grows

Merrill Lynch and Goldman Sachs issued damning research, suggesting that a return to the negative equity and plunging house prices of the early 1990s is likely. Dresdner Kleinwort and Cazenove were also scathing about the prospects for the industry.

Merrillwarned its clients: "We believe we have gone beyond the tipping point, and are now clearly seeing a UK housing market being squeezed on opposing fronts, by a lack both of willing lenders as well as willing purchasers."

In frenzied trading, shares of Barratt Developments, Taylor Wimpey, Persimmon and others plunged, leaving investors nursing hundreds of millions of pounds in losses.

Analysts say there are increasing fears for the future of some of the companies in the sector after two days of drastic erosion of equity.

Barratt, off another 20p to 711/2p, is seen as particularly vulnerable, with dealers predicting it will have to resort to a debtfor-equity swap in order to survive. The shares have fallen by more than 80% since the start of year, making a rights issue all but impossible.

Dresdner was particularly pessimistic. It issued a note to clients advising "don't buy at any price". Dresdner analyst Alastair Stewart thinks Barratt, with debts of £1.7 billion, would have to raise at least £1 billion.

"With Barratt's share price falling with seemingly no means of visible support, we have withdrawn our target price," he said.

Barratt was tight-lipped, a spokesman saying only: "At this particular moment, there is nothing we can say."

Persimmon, the housebuilder that is about to be ejected from the FTSE 100, saw its shares lose 22p to 3651/2p.

Merrill Lynch downgraded six housebuilders, saying: "The early 1990s housing market has increasing relevance as a comparator. There is growing evidence on consumers behaving in a manner similar to that seen in the early 1990s, in that concerns over job security and falling house prices are leading to a reluctance to make a house purchase."

The housebuilders will probably have to make huge writedowns in the value of their land banks. Those who bought aggressively in the past 12 months will be hit particularly hard.

With consumers reluctant to take any risks, few new homes are being built.

Cazenove said: "Actions speak louder than words and some actions by the UK housing companies are at full volume.