Friday, August 25, 2006

uk / uk builder

British Housing Nears the Upper Limit

Britain's homebuilders and property developers may have reason to feel sanguine in the wake of U.S. builder Toll Brothers' (TOL) 19% drop in third-quarter earnings, announced on Aug. 22. After all, the Brits are basking in the red-hot glow of a housing boom that has seen the average price of a British home almost double in the past five years.

That buoyancy is reflected in the results and outlook of Persimmon, Britain's largest homebuilder. Persimmon has seen profits rise 10%, to $340.5 million, as the average selling price of a home increased and it has integrated a takeover. The Bank of England's recent decision to implement a quarter-point rise in interest rates to 4.75% from 4.5% has had "no tangible effect," says a company spokesperson.

But the industry knows the heady pace of growth witnessed in the early part of the decade is certainly over. Additional interest rate hikes from the Bank of England will certainly constrain demand, but an even bigger factor, economists say, is that house prices in Britain are now so high that they are stretching the limits of affordability.


"At the moment, you're looking at still fairly steady growth" in the British market, says Ed Stansfield, a property economist at Capital Economics in London. "But the gap that's opening up between house prices and average earnings is potentially a problem." Capital Economics expects the market to grow 4% this year, 2% next year, and be flat in 2008. Those modest numbers pale in comparison to the double-digit gains that were seen for much of this decade.

House prices in Britain rose 0.2% in July after two months of declines, to an average of $333,992 according to the Halifax Index, kept by mortgage lender HBOS. The average price of a home was $181,922 in 2001. And mortgage approvals rose in June at the fastest pace in five months, according to the Bank of England. But with most economists already predicting further rate rises, lenders could soon put on the brakes.

One wild card: Since the vast majority of existing mortgages in Britain are adjustable, any rate increase will quickly impact most homeowners' monthly payments. And that could put a huge damper on the market. Still Yolande Barnes, head of residential property research at Savills Research in London, says that there probably is some breathing space before the market will see signs of a real slowdown. The Bank of England will have to raise rates to 5.5% to 6% before the market reaches a "crunch point," she says.


The British market has certain unique aspects that can keep the market from landing with a thud. The "buy to let" market -- buying for investment purposes -- remains robust, says Capital Economics' Stansfield. In the new-home construction market, companies like Persimmon and rival George Wimpey can stoke demand by offering incentives. (robust solange die preise steigen. siehe usa. beifallenden märkten wollen alle zur gleichen zeit raus.)

However, the supply vs. demand ratio could end up being the biggest ally to builders and the property market as a whole. In London alone, for example, about 35,000 new households will form each year through 2026, according to ODPM/Savills Research. The number of new homes added annually, meanwhile, is slated to increase by about half that.

"If I was in the business of supplying homes, I wouldn't be bearish," says Savills' Barnes. "Across all regions there is a shortfall." That's why he and others see rising prices for some time to come. (

Copyright 2006 BusinessWeek

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