Don't look now, but housing's on a cliff edge
Nick Mathiason Sunday July 17, 2005 The Observer
The whole housing industry - builders, lenders, estate agents and sector analysts - refuses to admit that the market is heading for jagged rocks. But there is compelling evidence that it is. For shareholders, the best thing to do may be to clear out a sector that has in recent years delivered strong growth.
Never have British consumers been as overextended as they are today. Interest rates may be relatively low but capital repayments on homes, loans and credit cards mean debts as a proportion of income are worse now than they were in the late Eighties - the last great house-price disaster.
Barely noticed last week was the fifth successive monthly rise in unemployment. This trend will continue. The retail downturn will be exacerbated by increasing property rents, oil prices and business rates. The result will be enforced job cuts.
House builders will have to follow suit shortly. Economists at ABN Amro
reckon unemployment could go up by 500,000 in 18 months' time. And if there's one thing that sparks a house price meltdown, it's a forced seller.
After five years of record profits and whopping dividends, the chickens
are coming home to roost for house builders. Deteriorating conditions in the British housing market were underlined when George Wimpey revealed at the beginning of the month that its first-half results would be 'well below' previous figures. Shares in the housebuilder fell
by 2 per cent as it also admitted sales had tumbled by 17.5 per cent.
Last Thursday, Bovis - one of Britain's best-run and best-performing builders - said it might not hit its sales targets. The company was aiming for 3,150 sales in 2005. But in the first six months, it had only 1,302. Underlying house prices, based on square footage, fell 1.6 per cent.
So far, slowdowns have been blamed on over-dramatic comments by Bank of
England governor Mervyn King that ushered in interest rate rises from
3.5 to the current 4.75 per cent. This year, house price drift was pinned on uncertainty in the run-up to the election.Homeowners and builders will next month breathe a sigh of relief if interest rates fall. But if sterling continues its recent decline, as is now widely feared, interest rates will be raised to fight inflation.
Whatever anyone says, house prices are on the edge of what may be a Niagara-like fall.