Last week the Government won the latest round for their controversial plans for 5 new Eco Towns to be built in the green fields of England but it’s far from certain that even if full planning permission is eventually granted they will ever be built. The reason? House builders and developers look to be on the road to bankruptcy.
The share price of the quoted house builders has fallen quicker than a Big Brother contestants will power. This time last year Barretts shares were trading at around £10. As I write this, you can buy as many as you want for 58 pence! Bovis were nearly £10 and are now 340p and Taylor Wimpey – formed when two big companies were merged are now at 62p down from nearly 400p.
But that’s not all. Other property-based companies have suffered too. Savills shares were 550p and have halved to 221p. Rightmove, the property website have fallen from 630p to 268p today. What is going on?
There is a market for shares in housebuilders, estate agents and property portals just as there are for flats and houses. My friends in the City tell me that of course it’s much more complicated (although a surprising number of them either were estate agents) and that the share price or ‘value’ of a Company is a complicated thing to establish. Not just anyone can do it, or so they tell me. The market apparently looks about a year ahead and the bloodbath that is going on suggests that pretty much everyone thinks that those businesses connected to the housing market are going to have a miserable 12 months.
What they are saying is that people who build houses are going to find it harder to sell them and possibly will find they can’t sell them at all. The latest figures from the Bank of England say that in May the number of mortgages approved was nearly 65% down on this time last year. In addition, the City lads and lasses think that house builders are going to find it harder to service the debt they have (sound familiar?)
Estate agents (like Humberts which was recently bought out of Administration) are expected to suffer because of low turnover. These firms make their money when there are properties selling and the value that they sell at is by and large irrelevant. But no sales equals no income.
Property portals like Rightmove are basically advertising businesses. Indeed many of the biggest portals were bought by The Mail group, Trinity Mirror, Guardian and Rupert Murdoch. If houses aren’t selling will agents be able to afford to advertise? New web businesses like Globrix.com are free for agents to use so the era of charging to list properties looks over and that’s certainly what the City thinks.
The future of all these businesses is thought to be highly uncertain and the Market is beating them to a pulp as the falls in share prices shows. Now it doesn’t automatically follow that the City is right or that even if it is that there is necessarily a link between these types of businesses and the value of the houses that these businesses are associated with. It is still possible to find people who are quietly confident that this is not the end of the world and as the Bank of England’s figures confirm, 42,000 people in May thought that what they needed was a mortgage.
Predictions for the housing market are looking blacker and blacker. All are negative which means that everyone expects houses to be worth less at the end of the year than they are today. I was talking to a respected banker last weekend and he is expecting house prices to fall by up to 50%. I can’t say that I am as bearish as that but it’s clear that neither the experts in the property market or the City are expecting the market to go anything other than down. For the time being the advice is pretty clear. If you can sell, get out now. If you don’t have to then sit tight and wait it out.
One last thing;- one of the emails I received this week which I will be dealing with in our consumer clinic next week asked how it is possible for prices to fall below the cost of building a home. Before the rest of you shriek it’s worth remembering that you have to be over 35 to have experienced a property recession first hand. For those of you who haven’t it’s worth explaining two things. First, you can buy the Chateau of your dreams in France for about a quarter of the cost it would be to build and in Japan, house prices fell by about 50% and stayed down. Stayed down for ten years.
If this is as bad as some are suggesting then you youngsters are in for a hell of a ride!