Housing faces new setback

Two sets of figures in the last week have reinforced fears that the housing recovery is under serious threat.

Figures from the Halifax for May show house prices fell 1.6% in what should have been one of the strongest months of the year, following a 0.2% drop in April. And, of possibly greater concern, new mortgage lending fell 14% in April, according to data released by the Bank of England last Friday. Any prolonged fall in the level of lending activity is bound to mean fewer transactions and have a destabilising effect on house prices.

Expectations of 4-5% price growth across the housing market have been widely assumed for this year.

And with land prices rising by 30%, according to some analysts, housebuilders' margins will be put at risk if this fails to materialise.

Worst affected will be builders who have planned inflation into their calculations for land. 'There are a lot of bids out there at the moment for land making some pretty heroic assumptions on inflation - say of about 5-7% in the next year,' says Dermot Gleeson, chief executive of Gleeson.

But companies with short land banks - less than three years - also face a margin squeeze before the end of 1995.

With new house sales continuing to be high in relation to second hand homes, analysts are also doubtful about the long term plans of volume builders, such as Wimpey, Tarmac and Barratt, to increase their market share.

'I think it's very dangerous for a housebuilder to say we're going to build 8,000-a-year by 1996. That implies "build at all costs,'"one broker told CJ.' People like Tarmac just don't have the ability to withdraw from the housing market. They have to buy 10,000 plots just to stand still. They are basically fuelling land price inflation all on their own.'

However the City is by no means persuaded that the trend in housing is definitely turning down - 'it would be the shortest cycle in living memory,' remarked one analyst. He points out that the Halifax survey directly contradicts the findings of a Nationwide Building Society, which showed 1.4% house price growth for May.

Industry feedback also challenges the theory that recovery has stopped in its tracks. 'We haven't experienced that kind of slip ourselves. Our experience of sales is that the new homes market has been sustained,' says Gleeson.

The Housebuilders Federation's Roger Humber says: '5% growth in house prices is still likely to be achieved.' And Beazer, which published results this week, says reservations were even stronger in May than in April, up 18% on the year before.

Jonathan Spencer, md of Wates Built Homes, also remains confident: 'Prices are holding steady, but visitor and reservation levels are probably up on last year.'

David Holland, chief executive of Wimpey Homes, comments: 'The market is not roaring ahead, but prices are generally holding, margins are improving, and sales are up on last year - all of which we find quite satisfactory.'

The respected housing analyst Jeremy Withers Green of Credit Lyonnais maintains that land prices remain the biggest threat to housebuilders. 'The unrealistic prices that are being paid must assume house price inflation.

'But without house prices actually falling, I don't believe the prices being paid will lead to significant write-downs in future.

'Rather, poorer levels of profitability.'