The housing market hasn’t hit bottom yet

Property companies are calling the bottom of the market, reports The Times.

Taking advantage of investors’ current generous mood, housebuilders Barratt and Redrow, and shopping centre group Liberty International stuck out their hands for a total of £1.13bn. The money will be used to pay off debt and build up land banks now that land is “cheap.”

We suppose you could suggest that this marks the bottom.

Or perhaps, it just shows that companies can’t believe their luck, and are rushing in to grab some easy money from institutions and individual investors before they return to their senses…

The property market news is not as good as it seems

The rush to raise money on the markets suggests that companies have learned that it’s best to be first in the queue for the money while investors are feeling frisky. House builders might genuinely believe that the market has bottomed now, but there are plenty of reasons to be sceptical. So why not raise money now, just to be on the safe side?

A first glance at yesterday’s property market news would certainly suggest that the market is booming again. In August, approvals for new house purchases as measured by the British Bankers Association were up 81% year-on-year, according to all the reports. That sounds promising, doesn’t it?

You have to dig a little deeper before you realise that they actually fell month-on-month between July and August, from 38,186 to 38,095. That doesn’t seem a big deal – you’d expect these figures to fluctuate – but it’s the first month-on-month decline in these figures since March.

Also, approvals might be well up on last year, but that’s only because they were so appallingly low in August 2008. If you compare them to July 2007, as Seema Shah at Capital Economics points out, then approvals are still down 40% from pre-crunch levels.


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So people are still clearly finding it difficult to get on the ladder or to trade up. That’s down to a couple of things. For one, it’s still difficult for first-time buyers to get home loans. Banks still want far bigger deposits than they did in the pre-credit-crunch days. That’s entirely understandable, but of course it means people have to save for longer and they can’t afford to pay as high a price.

Secondly, people are in no rush to get rid of their homes. In the 1990s, high interest rates forced people to sell up. Now, a rock-bottom base rate has meant that home loan costs have fallen for most people. So they can afford to stay put unless they absolutely have to move.

The trouble is, there’s a tendency for people to imagine that their property is “worth” just a little bit more than the highest price ever paid for a similar property in their little enclave. So if buyers are holding out for prices that sellers simply can’t afford, then all that happens is you don’t get any sales.

Banks aren’t in a position to lend

But won’t banks loosen the reins on credit? The trouble is, that assumes the banks are in a position to do so. And they’re not. James Ferguson, chief strategist at Pali International and MoneyWeek regular, keeps pointing out to readers of his Model Investor newsletter that the banks still haven’t written down anything like the scale of dodgy debts they wrote off in even the early 1990s recession, which was far less severe than today’s.

It’s a theme that Anthony Hilton also picked up on in last night’s Evening Standard. “Our banks are bust, or would be if the state was not prepared to stand behind them,” he says. And there are plenty of ropey loans waiting to be uncovered. There’s commercial property for one: today, £250bn of bank money is tied up in commercial property loans compared to £50bn in 1990. “What will happen when those loans fall due and have to be repaid or refinanced, given that property valuations are down by some 40%?”

Then there are private equity deals going bad. And the fall-out from the mania for infrastructure deals at the peak of the boom. Even more importantly, says Hilton, there’s the bog-standard fall-out that you’d normally see as a result of recession – personal and corporate bankruptcies, and rising unemployment.

There’s every reason for banks to tighten the reins on lending

So there’s no reason for bank lending to slacken off, and in fact, every reason for it to tighten up. In a property market which is still overvalued compared to average earnings, that can’t be a recipe for rising house prices. And as unemployment picks up, there will be more forced sales.

That’s not great for homeowners. And just as importantly, a low sales environment can’t be good for homebuilders. At the end of the day, homebuilders need to build and sell houses – the price at which they sell is less important, as long as it’s still enough to turn a profit.

So we wouldn’t be keen to invest in house builders here, particularly when there are many perfectly decent, cheap defensive stocks, all paying nice dividend yields (unlike the house builders), available instead.

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