Morning:
8°c
A funny old business, building houses. For a decade, builders tried to convince us that the process was more than simply capturing housing inflation, putting it through the accounts and paying it out as cash dividends. No, no, they'd say, we're really adding value here; see how our costs are controlled; see how magnificent are our margins; it's really not about inflation at all. It's safe as houses.
Not now. Investors in housebuilding shares are struggling to tell the difference between a bank and a land bank, as the prices of lenders collapse almost as fast as the value of the plots on which the new houses stand.
Not all the builders bear the selfinflicted wounds that have pushed Barratt Developments to the brink of bankruptcy - the company's market value is now just one-tenth of the £2 billion in cash and shares it paid little more than a year ago for Wilson Bowden - but all of them are looking over the abyss. As several analysts have concluded, it may be too late for rescue rights issues if the businesses are worth less than the debts they have to support.
Like the banks, the builders had assumed that they'd never run out of cash. The market would always provide. They were far more concerned about running out of land on which to build, so they bought enough for years ahead, just to make sure.
This is an expensive business. The plots produce little or no income and the planning process eats more money and time. Then there's the tedious business of building in compliance with the forest of regulations. Enterprising builders sold houses and flats off-plan, but essentially all the money comes in at the end of a long process.
This was a bonus when house prices were going up, with the Government forever bleating about a housing shortage, but the buyers had no cash either, or not their own. They relied on the 100% mortgage, or 120% in the case of Northern Rock. Saving up to buy a house was a quaint left-over from a different age.
This virtuous circle has now gone violently into reverse. The lenders won't lend more than 80% of the purchase price at best, and the buyers have no hope of finding the other 20%, even if they can afford the mortgage costs when food and fuel is shooting up and take-home pay is static. No wonder the housebuilders experienced their version of Silent Spring.
The other ingredient in this toxic mix has yet to be added; so far, there has been no significant rise in unemployment. People are scared to move, but if they are earning, they will continue to pay the mortgage, even if it's a struggle. Lose your job, and you may have no choice but to sell up and borrow a tent.
Unemployment (or numbers on disability benefit, which is disguised unemployment) is going to rise, so it's going to get worse. Cash buyers of two-bedroom flats in Leeds, for example, can almost name their price, as the results from property auctions show with ghastly clarity.
It could be a lot worse; look at Spain and America, where they have been plastering the landscape with new homes, to see how bad. In some midwest American cities, it's impossible to say what your house is worth when half the others in the street are boarded up. Given the running costs, it might be worth nothing at all.
So as house prices plunge, we might spare a cheer for those two muchmaligned groups, the town planners and the Nimbys. But for the glacial pace of the first group, and the rearguard action of the second, the Home Counties would be concreted over by now.
One day, the housing market and the fortunes of the housebuilders will revive. It's not going to happen soon, but at least we'll have a pleasanter place to live when it does.
