Morgan Stanley slashes forecasts for house builders

Morgan Stanley cut its profits forecasts for UK house builders by as much as 27 per cent yesterday, citing cost inflation as the industry's main challenge in a flat house-price environment.

Morgan Stanley cut its profits forecasts for UK house builders by as much as 27 per cent yesterday, citing cost inflation as the industry's main challenge in a flat house-price environment.

The blue-chip investment bank said: "We believe cost inflation is the industry's key challenge. While we do not expect new house price falls, cost inflation markedly erodes earnings prospects, and we think the downside risks still outweigh the upside."

The warning comes a week after Experian, a leading business analysis firm, said this year's 12 per cent surge in builders' costs had crippled their profit margins.

Morgan Stanley also slashed its share-price targets for three major house builders. It cut its forecast for Persimmon by 13 per cent, Barratt Developments by 11 per cent and Wimpey by 7 per cent. Persimmon's shares fell 12p to 627p, while Barratt shed 3.5p to 516.5p. Wimpey shares went against the trend, rising nearly 2p to 359.25p.

The report is the latest warning about the state of the housing market to come out of the City. Countrywide, the UK's largest estate agent, last week issued its third profits warning in as many months, saying the number of transactions in the pipeline was down 33 per cent on a year ago.

Taylor Woodrow last month scaled back by 6 per cent its prediction at the start of the year that it would sell 10,000 homes in Britain this year. Meanwhile, Christopher Smallwood, the chief economic adviser at Barclays Bank, warned prices would slump more than 20 per cent. Hepencilled in a fall of 8 per cent for next year followed by similar declines in 2006 and 2007.

Deutsche Bank has issued a report that sees prices falling by 10 to 15 per cent over the coming year and "flatlining" thereafter. Yesterday FPDSavills, a leading estate agent, forecast prices would rise just 2 per cent next year, the lowest increase for almost a decade. The rise would be followed by several years of growth of less than 5 per cent, it said.

Savills said the market faced years of stagnation as the link between household incomes and property prices returned to its long-run average. It forecast rises of 2.0, 2.6 and 3.8 per cent over the next three years but Richard Donnell, its head of research, dismissed forecasts of a crash. He said: "I think that, other than in a recession, there will always be demand for housing going forward and we have relatively low interest rates and full employment. You need forced sales to drive prices down."

He added that an endemic shortage of homes, especially in the South-east where there is an annual shortfall of 30,000 homes, would support property prices.

Meanwhile, the Council of Mortgage Lenders said the proportion of first-time buyers in the UK had fallen more rapidly than in any other country surveyed. Michael Coogan, its director general, said: "The research findings present a clear case for the Government to look afresh at how tax and benefit policy is ... adding to particular problems for first-time buyers."