UK house builders, just like UK banks, are in trouble.
Turns out those tasty dividend yields weren't signalling bargains, they were signalling danger. The UK's biggest house builder Persimmon (PSN) saw its shares take a dive yesterday, as it reported that sales in the first four months of the year had fallen by 24%.
It's shouldn't come as a surprise of course. The number of mortgages being doled out has collapsed this year, so you'd expect house sales to do likewise.
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Yet up until recently, the house builders have been praying for an upturn. And now they're praying for government help instead
Persimmon chief executive Mike Farley, facing plummeting house sales, called on the Government to scrap stamp duty on houses under £250,000 for first-time buyers.
Now, I'm not sure what Mr Farley thinks that cutting stamp duty will achieve that he cant do himself. Stamp duty costs 1% on purchases between £125,000 and £250,000. Mr Farley could achieve the same tiny discount by knocking a few grand off his asking prices.
He also argued that: "this is not so much a pricing issue as about mortgage availability. For the first time in my experience there are not enough mortgages for the houses available." In other words, the price of homes is justified, it's just that the banks won't release enough money for people to buy them.
Well, the only reason prices were ever this high in the first place was because there was so much money available to pour into property. That's not the case anymore, and that makes it a pricing issue whether Mr Farley likes it or not. A house - just like anything else - is only worth what you can sell it for. And right now, that's a lot less than it was at this time last year.
Housing slump will lead to job losses
But we knew the housing market was in a slump already. The really worrying thing is that now the unemployment toll is about to rise. Persimmon warned that it will stop building on new sites until the mortgage market picks up. The group had been planning to start work on 30 sites this month.
In the UK, construction officially employs two million people, reports The Times, "and considerably more through the supply chain and casual labour." According to the paper, 500,000 construction workers were laid off between 1989 and 1994 - and this time it could be worse.
The North East and Yorkshire are apparently already suffering from the construction slowdown. That's particularly bad news, as the region is about to be hit by a wave of job losses from Northern Rock. The now-state-owned bank is to cut 2,000 jobs over the next three years, reports The Telegraph.
Of course, stopping building may well be the most sensible reaction to the housing slump, though painful for those at the sharp end. For one thing, builders need to watch their cash flow - Persimmon has said that its priority is "on management of cash flows and close control of costs within the business" to protect its balance sheet. As sales fall, the amount of cash coming into the business will fall, while profit margins across the industry are already being squeezed by rising spending on marketing and incentives' like paying a buyer's mortgage for six months, or giving them a free' kitchen.
And like it or not, the builders probably reckon that restricting supply is one way to try to arrest the decline. In the US, where the housing slump has been going for well over 18 months now, there's no sign of recovery. The number of new homes unsold and on builders' books over there rose to 11 months of normal supply, the lowest since September 1981, reports James Quinn in The Telegraph. New home sales are at a 17-year low, while the average selling price has fallen to $227,000, down 13.3% year-on-year.
But the Government ostensibly wants to build more homes to make properties more affordable for first-time buyers. And yet, the Government also doesn't want house prices to fall.
The good news is that neither has to make a decision. Because prices are going to fall anyway, and that will make property more affordable for first-time buyers. Better yet, we'll get a decent view of the true supply and demand picture. Homes that are in genuinely short supply, such as family properties with a nice garden in a decent area will see their prices fall least. Those which are hugely overbuilt such as two-bedroom city centre flats which have been built solely for the purpose of selling to amateur landlords will see (and already are seeing) their values drop like stones.
That'll give the builders who survive this downturn an incentive to build the right kind of houses next time round.
Turning to the wider markets
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The FTSE 100 fell 32 points to close at 6,050. Reckitt Benckiser was the top gainer, after first-quarter profits came in ahead of expectations.
Across the Channel, the Paris CAC-40 rose 10 points to end the day at 4,954. And in Frankfurt, the DAX-30 gained 26 points to 6,821.
On Wall Street, US stocks moved higher as earnings from insurers came in above hopes. The Dow Jones rose 85 points to end at 12,848. The broader S&P 500 closed 8 points higher at 1,388, while the tech-heavy Nasdaq gained 23 points to close at 2,428.
In Asia this morning, Japanese stocks hit their highest in two months with financial companies amongst the biggest risers. The Nikkei 225 gained 332 points to 13,863.
Crude oil was trading at around $115.41 this morning. Meanwhile Brent spot was trading at $113.34.
Spot gold was trading at around $880 an ounce this morning as the dollar strengthened, while silver was trading at $16.43. Platinum hovered around $1,917.
Turning to forex, sterling was trading at 1.9699 against the dollar, and at 1.2632 against the euro. The dollar was last trading at 0.6415 against the euro and 104.86 against the Japanese yen.
And this morning, shares in advertising giant WPP fell after it reported that sales in March in Western Europe slowed "somewhat surprisingly". First quarter sales rose by nearly 5%.
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Spot gold was trading at around $880 an ounce this morning as the dollar strengthened, while silver was trading at $16.43. Platinum hovered around $1,917.
Turning to forex, sterling was trading at 1.9699 against the dollar, and at 1.2632 against the euro. The dollar was last trading at 0.6415 against the euro and 104.86 against the Japanese yen.
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