Westhouse Securities: Switch from housebuilders into contractors

“Two speeches by George Osborne symbolise our view that investors should switch out of housebuilders into contractors. The Chancellor’s speech at the Mansion House on 12 June, threatening tighter mortgage lending, triggered sharp falls in housebuilders’ shares. He then proposed ‘High Speed 3’, creating a northern ‘Super-city’. The government appears to be moving infrastructure up the political agenda. The rally in housebuilders’ shares post-FPC is an opportunity to switch to contractors; our featured pick is Kier.”

London leading a turn in the housing market?

“We are hearing increasing anecdotal evidence that the London housing market has already started to turn, with estate agents suggesting there have been fewer viewings and offers, as well as lengthening transaction times and some price reductions. This may have been in response to the tougher lending criteria imposed by the Mortgage Market Review. Historically, the London market has tended to lead the rest of the country and London and the South East have been the focus of housebuilders’ marginal land buying during the latest cycle. Even though the FPC’s imposition on high loan to income mortgages looks lighter than many feared, we believe it is squarely aimed at the London market and could impact the volume of Help to Buy mortgages for new homes.”

Infrastructure back on the agenda

“Housing policy has taken centre stage in the political debate in recent months, with Conservatives, Lib Dems and Labour all enacting or proposing far reaching and, in our view potentially damaging, interventions in the housing market. However, two initiatives suggest the political imperative is shifting back to infrastructure: Osborne’s proposals to improve transport links between Liverpool, Manchester, Leeds and Sheffield; and China’s treaty to contribute funding to High Speed 2 and new nuclear power stations.”

Housebuilders at risk from tougher regulation

“In our view housebuilders are at risk from potentially slowing transactions, perhaps falling prices and any regulatory or political interventions – a potential limit on the scope of Help to Buy. An additional concern is that land and material prices appear to be rising irrespective of any slowdown in transactions. If these trends continue to diverge, we believe housebuilders could be caught, once again, in a squeeze on profits.”

London housing market turning?

“We are hearing increasingly concerning statistical and –probably more importantly – anecdotal evidence that the housing market may be turning, particularly in London. To date, this has not been reflected in statements from housebuilders, which have so far been heftily supported by the government’s Help to Buy initiative.”

Delayed statistics indicate market has already turned

“Statistics are now starting to filter through showing a marked reduction in housing market activity in the last two or three months, with most of the attention focused on London. In our experience, the fundamental signal for a turn in the market is in the interplay between the number of new buyers and sellers coming into – and out of – the market.

The RICS survey has for the past few months shown a deteriorating trend for new buyers and early signs of sellers coming onto the market. In both cases, the trend has been most marked in London compared to other regions of England & Wales (see our report RICS – Stringent lending stems demand, 12 June 2014).

For England and Wales as a whole, the net balance (ie, agents reporting a rise less those registering a fall) trended down from +60 in November last year to +13 in May. As they are both positive, this indicates that there was still an increase in buyers last month across England and Wales, but at a much reduced rate of growth.

However, London experienced an actual fall from +72 last October to -13 in May. The two balances had tracked each other quite closely between August 2011 and the end of 2013 (LHS), but the London balance had been much stronger, though erratic, before that and, since January, significantly weaker. This suggests that, at turning points in the overall market, London has turned earlier and by a more extreme margin. The same pattern – in reverse – emerges for the number of new instructions to sell (RHS): for England & Wales the number of new sellers has been falling (a negative balance) albeit at a slower rate of decline; but for London the reading has been positive for two of the three last months (an absolute increase in vendors).”