British house prices have been rising for the past five months, reckons Nationwide. That’s helped to boost the share prices of major house builders such as Barratt, Taylor Wimpey and Persimmon. But investors shouldn’t pile in – the sector’s woes have not disappeared, they’ve just been hidden.
The problem, as ever, is debt. Credit ratings agency Fitch has calculated that debt due for repayment (“maturities” as they call it) for the house building sector in 2011 and 2012 totals £7bn. That’s roughly the market capitalisation of Britain’s largest eight house builders.
And here’s the rub. As Ewan Macaulay, associate director of Fitch corporate finances notes in The Telegraph: “Without a significant improvement in market conditions, sizeable disposals or additional equity raising, it is unlikely that homebuilders will de-leverage quickly enough to repay those 2011/12 maturities from internal resources”.
To be clear on exactly what that means, Fitch then talks about “one or more” of them “not being able to access sufficient new finance”. In plain English we could see some of our biggest homebuilders go bust.
So don’t be fooled. Rising house prices based on the limited number of homes for sale have offered the sector an unexpected breathing space. The land and property assets on which much of their debt is pinned have at least stopped falling in value, for now. But the agency warns that the crisis created by overborrowing when prices were skyrocketing has merely been “postponed”.
So if you haven’t taken any profits you’ve made in the sector, at least make sure you have a stop loss in place so you don’t lose them when the crunch comes.