Just when you thought the UK housing market had to calm down after 2021’s exuberance, it turns out buyers’ appetite kept growing, even in the darkest days. Britain’s housing market saw its strongest January in a decade and a half – its fastest growth rate since 2005. Annual price growth hit 11.2% and the average price of a home reached £255,556, according to Nationwide.
All of this is music to the ears of the UK’s largest housebuilders – many of which are reporting 2021 results this week – and should have paved the way for bumper profits.
The boom has seen the likes of Persimmon, Taylor Wimpey and Vistry (formerly known as Bovis Homes) bank higher profits as they also benefit from more than a decade of ultra-low interest rates, central bank exuberance and Treasury munificence via the Help to Buy scheme. What, if anything, can halt their winning streak?
Well, the events of the past week, coupled with the wider stock market gyrations since the start of the year, may give some pause for thought. Despite their run of soaring sales, housebuilders have fallen out of favour with investors in recent months. Persimmon and Taylor Wimpey’s shares are around a third below highs seen last April, and it is a similar story at Vistry.
And shareholders are right to be cautious. The cost of living crunch is eroding households’ spending power, at a rate that continues to confound central bankers. As energy, fuel and food prices march ahead of wages, there is a growing risk that this will bleed through to the housing market. Rising interest rates could dampen ambitions, although mortgages still remain incredibly cheap by historical standards. Worse still is the threat of a concerted global downturn, amplified by Russia’s invasion of Ukraine, which could dampen already-faltering consumer confidence and house purchases.
Then there are the rising costs housebuilders themselves face. The construction industry has been grappling with higher costs as supply chains were disrupted by the pandemic, though so far the biggest players say costs have been more than offset by rising house prices. It’s not just the price of materials that is rising: as across many sectors, workers have been demanding higher wages amid ongoing staffing shortages.
All of this could squeeze margins for housebuilders, which report that shortages of brickies – who can name their own price – and lengthy lead times on materials are eroding profits and damaging efficiency.
There’s also the question of who pays to rectify the cladding scandal, which is likely to become a hot topic again, according to City analysts. In recent weeks, ministers have laid out details of how the government plans to make developers in England, as well as manufacturers, bear the costs of replacing dangerous cladding. Developers have to commit to a £4bn plan to fix it on low-rise flats. Ministers have also threatened a “cladding tax”, which would be set at 4% of any pre-tax profit over £25m.
Meanwhile, the government intends to end its Help to Buy scheme – the £29bn subsidy aimed at first time buyers – in March 2023.
All this means a baptism of fire for Taylor Wimpey’s new boss, Jennie Daly, who takes over from veteran chief executive Pete Redfern in April.
For years the housing market has looked increasingly detached from reality, with prices reaching ridiculous multiples of salaries and sky-high profits for the housebuilders. But they may be about to come back down to earth.