Business Analysis: Has the boom ended for Britain's new home builders?

Housebuilders say Bank's policy has already cooled the overheating property market
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The Independent Online

Do television home make-over shows provide the answer to Britain's runaway housing market? Is it all down to Laurence Llewelyn-Bowen's velvet drapes and the national obsession with home improvement?

Do television home make-over shows provide the answer to Britain's runaway housing market? Is it all down to Laurence Llewelyn-Bowen's velvet drapes and the national obsession with home improvement?

One striking feature of the housing market is that while the main surveys from the mortgage lenders Nationwide and Halifax continue to show annual house price inflation running at a fierce 20 per cent, the major housebuilders have seen their home selling price rise by less than half that rate in recent years.

According to one of the country's leading housebuilders, Taylor Woodrow, the answer partly lies in home improvement. The company is not really talking about Mr Llewelyn-Bowen's brand of staple-gun and MDF cosmetic improvement but structural changes that owners make to a house that significantly add to the value of an older home.

The amount of money spent by a homeowner on an extension or a loft conversion is not taken into account when that property is sold and its selling price enters the statistics. So, if a person buys a property for £200,000, spends £30,000 on improving it and sells it for £240,000, it shows up as a 20 per cent price rise. Of course, such improvements are not a factor with new homes.

Peter Johnson, Taylor Woodrow's finance director, said: "I'd hope the Monetary Policy Committee has a more sophisticated understanding of the market than taking Halifax and Nationwide [surveys] at face value ... these are unreliable pointers."

The size of the DIY market in the UK is more than £9bn. Add to that the money that homeowners pay to builders for improvement work, and the annual expenditure on enhancing homes - thereby making them more valuable - exceeds £23bn. That's a pretty substantial factor in the market that the pure selling-price statistics ignore.

The housebuilders are desperate to halt the current cycle of rising interest rates and have been screaming at the Bank of England that the "medicine is working" - that is, the market has cooled and we now have "sensible" conditions. Taylor Woodrow, reporting its financial results yesterday, was the latest to add its voice to this campaign.

The estate agents have common ground with the housebuilders here and they have been even more strident on the issue. What particularly worries housebuilders and agents are the monthly figures from Halifax and Nationwide. These surveys continue to show an apparently unsustainable housing market, to the exasperation of the builders and agents. They worry that the Bank, which is again expected to raise interest rates this month, bases decisions mostly on the Halifax and Nationwide's evidence.

The chief executive of one of the leading national estate agency chains, Paul Smith of haart, lashed out at last week's figures from Nationwide, calling them "irresponsible", after the statistics showed that any slowdown seen had abated. Mr Smith added that there were signs buy-to-let investors were cashing out, having decided that we are past the peak. He said: "Our figures for July show that sellers are seeing up to 5 per cent wiped off their asking prices compared with only a 1 per cent reduction in May. Also the number of new buyers is continuing to fall and decreased by 22 per cent during the last two months." Rightmove, the property website, today releases a monthly report which also shows asking prices slipping in July.

The fear among builders and estate agents is that after four interest rate rises since November, more increases would over-do it and turn the housing boom into a housing bust. Some exconomists have warned that houses are 30 per cent overvalued. George Wimpey, another leading housebuilder, said last week that it was seeing price inflation on current reservations of just 3 or 4 per cent - about the level of wage inflation. Taylor Woodrow yesterday put it at 5 or 6 per cent but, either way, that would represent a considerable slowdown.

Mr Johnson reiterated the industry's clarion call, emphasising that the Bank's job is to target inflation, not asset prices, and that even if they were trying to prick the housing bubble, the desired effect had been achieved. "The Bank of England has done its job. They've succeeded, with respect to house prices," he said.

It may not be that simple. The Bank may wish to see a correction rather than a slowdown, which would mean that it would like to see house price inflation running at below earnings growth for a number of years. Figures from Halifax are today expected to show another bumper rise in prices in July. JP Morgan expects a monthly rise of 1.6 per cent, up from 1.2 per cent in June, to take the annual rate to 22.3 per cent. This would support last week's figure from Nationwide that annual inflation had broken back through 20 per cent. Alex Bannister, its group economist, said it was not a surprise that housebuilders selling detached homes in the South-east were not seeing double-digit inflation. "They are not comparing apples with apples," he said. "You can't ascertain property prices by going to the pub."

Mr Bannister said bodies such as Nationwide and Halifax adjusted their figures to ensure they were not biased towards the most expensive houses or to any one region. "Few of the housebuilders are able to take an overview of the market," he said.

He added that detached homes, especially in London and the Home Counties, had seen very low rates of growth over the past year. "If you asked people buying property in Scotland or the North of England whether they were experiencing low single-digit rises, they would laugh in your face," he said. "It may be that builders are not seeing their asking prices rising by 20 per cent and they feel bitter about it."

The latest regional figures from Halifax showed that while house prices inflation in London and the rest of the South was running at about 12 per cent it was hitting levels of 35 per cent in the North. Mr Bannister acknowledged the argument that the mainstream house prices measures did not take account of quality improvements in homes. He said: "There may be something in that, and over the medium term that would produce some difference, but that can't possibly be the explanation for 5 per cent versus 20 per cent."

Housing experts believe it is impossible to produce a perfect measure for house prices. The Office of the Deputy Prime Minister (ODPM), whose index gives more weight to pricier homes, shows inflation at about 12 per cent. The Land Registry, which makes no attempt to adjust the raw figures, has inflation at 14 per cent, with new homes at 9 per cent and old properties on 14.5 per cent. On top of that is a raft of surveys by estate agents such as Rightmove, Hometrack, and the National Association of Estate Agents.

Only yesterday Hamptons International bucked the trend with a forecast that prices in the South would grow a healthy 7 per cent this year. It said a shortage of properties and the re-emergence of investor buyers would trigger a rise in activity in September after the summer slowdown.

Perhaps, ironically, the answer is yet another survey. If the housebuilders banded together to produce a monthly survey of their selling prices then at least they would have some hard data to wave in the faces of the members of the MPC.

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