Saturday, 30 November 2013

What the weekend papers say

BoE Governor warns homebuyers "can you afford your mortgage if interest rates go up?" and cautions against expecting house price inflation to bail them out, Guardian interview • Knight Frank's view of flat Prime Central prices in November prompts "London house price fears" splash in FT • home buyers being rejected by "unfair" credit scoring system, Times Money •  WAGnificent! Beckhams' new £30m, 9,000+ sq ft Kenington palace, with four nail bars, catwalk and waterfall, Mail

All in the best possible taste ...

Friday, 29 November 2013

Brickmakers fire up for Christmas stocking

For the past half dozen Christmases, brickmakers (those still in jobs) would be firing up the brandy sauce rather than their kilns, but this year they may have to miss the Yuletide Strictly Come Dancing special. After five years of belt-tightening, manufacturers are having to catch up and that means working over the winter, including for some the festive period, for the first time since the financial crash.

Brick production in this country retrenched even faster than housing starts, leading to brick stocks falling by more than two-thirds (see chart 1, below). While deliveries in 2013 are likely to be down 8% on 2008, production has been cut by 24%. Plants were closed or mothballed, workforces were slashed and long winter shutdowns became the norm.

Housing Minister Kris Hopkins ironically boasted yesterday that UK manufacturers will have this year made enough bricks to stretch nine times around Earth, according to a jolly little press release from the DCLG.

A supply-demand imbalance is developing among brick layers who, no doubt, recall, like the manufacturers, being screwed down by their customers for the past several years

Sorry Kris, but that just ain’t enough. Now the industry is carrying stocks equivalent to just 11 weeks of deliveries, against 32 in 2008. With the housebuilders gearing up to boost their output significantly (but not anything like government is hoping for) and commercial work recovering in some sectors, this figure could shrink even more in the months ahead.

Hence the almost entirely foreign owned industry’s decision to crank up production. Ibstock, owned by Ireland’s CRH, the UK’s number one, plans to keep all 20 of its plants open during winter for the first time since 2007, according to the FT. Staff of Hanson (offshoot of German Heidelberg) and Austria’s Wienerberger could similarly be manning the kilns rather than tucking into the Stollen and Gluewhein.


Alastair Stewart's chart 2

That’s not to say they’re going to be giving the stuff away. While Britain’s housebuilders are pretty big at the top, the brick industry is dominated by an oli-, sorry, trio of global behemoths. No guesses for who has the greater pricing power; even if production goes up, prices are likely to continue a similar upwards trajectory, referred to recently by most of the builders. A similar supply-demand imbalance is developing among brick layers who, no doubt, recall, like the manufacturers, being screwed down by their customers for the past several years.


Alastair Stewart's chart 1

To make things worse, bricks have become trendy outside the new housing sphere (which accounts for 42% of end-users, see chart 2, above), according to architectural pundits. In October the FT’s architectural critic Edwin Heathcote waxed: “For decades, brick has seemed to be confined to the endless exurban landscapes of the mass housebuilders, the much derided Noddy boxes [etc etc]. In the centre of the city it was replaced by glass, steel and spuriously colourful panels, an architecture as paper-thin in appearance and as lacking in texture as it was in ideas. But now, I hope it is safe to say, brick is back.”

If, indeed, brick is back, Kris Hopkins will have to cut the ribbon on quite a few new kilns in the months ahead.

This was first post on Building magazine's website on 29 November 


Round-up │ 29 November 2013

In Briefing:  Annual house price inflation rises to 6.5%, highest since 2010, Nationwide

Other: most housing shares continue to drift downwards today after yesterday's big falls after Mark Carney shelves mortgage support under Funding for Lending • New home registrations up 24%, NHBC • 34% of contractors in Q3 reported difficulty in recruiting bricklayers, up from 7% at beginning of year, Construction Products Association

Thursday, 28 November 2013

Carney calls time on cheap lending scheme

Housebuilders' shares fell by up to 8% from mid-morning as Bank of England governor Mark Carney signalled a fundamental shift from January in the Funding for Lending Scheme, away from supporting mortgage lending towards business funding. Although most of the strong performance in the housing market this year has been put down to the introduction and then expansion of Help to Buy, at least the initial stimulus came from FLS by which the BoE provided up to £60bn for banks, to be passed on in readier lending to households and businesses.

Carney said: "Since the FLS was launched [last year] it has contributed to a substantial fall in bank funding cost, this has fed through to a significant improvement in household credit conditions. Given this success there is no longer a need for FLS to provide further broad support to household lending".

The big question is how this leaves the outlook for both phases of the Help to Buy scheme, equity loans for new homes and, more recently, government guarantees for up to 95% mortgages on all homes. Phase 1 has been very successful, being involved in around a third of all new home sales, but Phase 2 has been widely forecast to risk stoking a bubble.

In recent weeks Carney there has been a reported widening rift between Carney and the Treasury over both the effectiveness of H2B and the BoE's powers to influence its scope (see Briefing). According to reports today, Carney's press conference comments have been supportive on a short-term basis but non-committal more than a year out and indicated the Bank could get more interventionist on loan-to-value and other affordability criteria (the opposite to government measures to support 95% mortgages). 

An even bigger elephant in the room is what this toughening in stance, and Carney's propensity to spring surprises, suggests about the future deliberations on rate setting by the Monetary Policy Committee, which he chairs. More lending to smaller businesses should translate into greater employment growth, which could hasten the fall to 7% unemployment - the highest profile but not exclusive trigger for rates rises. A portent was a further rise in Sterling today.

Carney's surprise ("but not shock", Council of Mortgage Lenders) move indicates he does see signs developing of a bubble; the likely outlook for housing market funding, either through monetary or government stimuli, is getting tighter.

•  By contrast share in Aim-listed Sigma Capital Group, a housing and urban regeneration specialist, soared by 54% on the announcement of a potentially £700m deal to build up to 6,600 homes for private rent. Build to Rent has been painfully slow to get off the ground, but this move suggests that an alternative route to expanding housing supply may be gaining momentum.

Round-up │ November 28 2013

In BriefingCarney drops a bombshell, while merchants, policy makers and now brickmakers feel the heat (Economic) Mark Carney hints at widening rift between Bank of England and Treasury over Help to Buy ... then stymies household Funding for Lending │ (Corporate) Wolseley highlights growth in UK and UK and grim Europe "for the foreseeable future" • Sigma signs on ground breaking build-to-rent deal │ (Industry) brickmakers fire up for busy Christmas, to replenish stocks.

Other: commercial property-backed bonds the latest focus in securitisation issues, FT, further underpinning the return of the "slice-and-dice" market.

Wednesday, 27 November 2013

Telford's big call on London

London housebuilder Telford Homes’ half year results this morning were nothing if not bullish. And probably not without reason. Even though unit sales completions were down a bit (225 versus 256 a year earlier), prices, margins and profits were all up. But most notable was the gusto of the outlook statement: “The board is very confident of the prospects and growth potential for Telford Homes over the next few years”.

Big call. A few years is a long time in housing, Harold Wilson might have said. Even the most ebullient of housebuilders would define their horizons in terms of “the foreseeable future” and the like. To support this view Telford, which focuses on the eastern and northern fringes of inner London, points to its forward sales position: all of its budgeted sales for the year to March are in the bag, as it were, and it is 80% and 60% for 2015 and 2016 respectively. In Building magazine’s website chief executive Jon Di-Stefano said he plans to double the size of the company within five years.
Rather churlishly, the shares were off almost 2%, while most housing stocks were up by a percent or so. They had, however, hit a multi-year high yesterday, based on the current strength of the London market. Doubtless there is the old City adage about travelling and arriving. But maybe there was a note of concern about the pace of land buying, which the statement said was ahead of its forecasts, having raised £20m in an equity raise in June.

Reports that the London land market is getting not just over-heated but super-heated are coming in from all directions and having millions burning a hole in one’s corporate pocket at such a time is not necessarily a good thing.

Trying to call the top of the London market is a dangerous business (I’ve got the scars to prove it). But equally rash is assuming the boom times, to paraphrase another deceased Prime Minister, will “go on and on”.

Round-up │ 27 November 2013

In Briefing:  (Economic) BoE Governor at odds with Osborne over Help to Buy during MPs' grilling • US house prices continue to rise as building permits hit five year high (Corporate) London-centric Telford Homes bullish looking forward "next few years" and accelerating land buying.

Tuesday, 26 November 2013

Boris the Builder. Can he fix it?

London’s ebullient mayor Boris Johnson rarely shies away from largesse, particularly when it comes to building projects. Think only of the 2012 Olympics and the somewhat more speculative “Boris Island” airport. If the airport is ever built (a long shot), the first planes may be landing just about as the last houses are being delivered under his 20-year plan to add nearly a million new homes to the capital.

His Draft London Housing Strategy (see Briefing, Industry and Politics) envisages building 42,000 homes a year, every year for two decades (by which time he just might be Britain’s longest serving Prime Minister). That’s between two and four times the fluctuating annual total for the past 30 years and exceeding even the build rates of the 1960s and 1970s.

The consultation paper (for which submissions have to be returned by 17 February) envisages “Housing Zones”, similar to the old Enterprise Zone, where there will be tax breaks and easier planning regimes; £1bn a year of public investment from 2015 - 18; a new housing bank; land made available by the Greater London Authority; and an attack, including the threat of compulsory purchase orders, on any developers judged to be hoarding their land. Interestingly, there is the proposal put forward by practitioners on the “build-to-rent” sector for special planning treatment on the basis that properties will be available for private rental at below market rates for 10 years.

All individually do-able stuff, except who’s going to “do” it? Not housebuilders. Their open market model simply doesn’t work on anything like this scale, particularly with rivals breathing too closely down each other’s necks. Their five-ish year plus "strategic" land banks also risk the ire of County Hall. The private rented sector could finally get the kick start it has needed, especially if it can level the playing fields (metaphorically, unless this is where Boris has earmarked for land) in terms of the premium housebuilders can pay for land. But it would take the sector 20 years to build itself up to these sorts of volumes. It could possibly done on a mixed-use PFI-style model, with construction groups in charge, but where would the workers be found, especially if half of the population of Warsaw is busy on the Thames Estuary Airport?

In short, there are a lot of good ideas in the report, but, to employ an Olympics metaphor, the bar needs lowering. My guess 25,000 – 30,000 units-a year-tops. And if BAA refuses to budge from Heathrow, build them all on Boris Island.

Round-up │ 26 November 2013

In Briefing: (Industry and politics) Big plans for London - Boris's 20 year plan to build almost 1 million homes and, more modestly (and more deliverable), green light for £1bn, 1.5 m sq ft shopping and housing scheme in Croydon • RWE pulls plug (literally) on £4bn offshore wind farm │(Corporate) Back from the brink, restructured steelwork group Severfield-Rowen returns to underlying profit│ Other: probe into allegations that RBS profited from putting businesses under focusing on property angle  

Friday, 22 November 2013

Round-up │ 22 November 2013

In Briefing: (Politics ) Parties step up the rhetoric, with Labour promising to double housing output, while housebuilders’ shares step up on Help to Buy data │ (Economic) CML predicts transactions will top a million for first time since 2007 ││Will they, won’t they (raise rates soon)? BoE chief economist Spencer Dale says economic recovery will take a “number of years”  • Meanwhile in US, more dovish signs emerge in the Will they, won't they (taper) debate.

Thursday, 21 November 2013

Round-up │ 21 November 2013

In Briefing: A raft of housebuilding stats tick all the right political boxes •(Economic) First phase of Help to Buy gets off to a flying start • private housebuilding starts in England 29% up year-on-year • housing transactions close to six-year high

Help to Buy: the positives. And negative.

Politically, the first phase of Help to Buy looks a resounding success according to statistics out today. Since the April launch of the scheme, designed to let buyers purchase newly built homes with a 5% deposit (and the government taking up to a 20% stake in the property), 5,375 had been sold. This looks like almost 20% of all housing completions, with that figure likely to rise (see Briefing, Economic).

The vast majority were for first time buyers, not second home owners; they were for low-to-middle earners, who had been frozen out of the housing market; and they were well spread across England, not just the affluent South East. That ticks all the right boxes for a government still seen by many as leaning more to big business, Southern England and the well-heeled.

It is also helping getting Britain building, with Q3 private starts up 29% in England, albeit from a low base. For the big builders H2B is probably going to account for around a third of output over the next couple of years.

But the people literally buying into this may find they have taken on more than they can chew. The mean price of a property bought under the scheme was £194,167, with an average equity loan of £38,703, indicating the vast majority of buyers are putting down the minimum deposit.

Interesting, official statistics do not give the mean household income of buyers, but present it in bands. 22.5% are in £20 - 30k, 27.2% are in £30 - 40k and 19% up to £50k. Let’s have a stab and say the mean is £35k. That corresponds to 5.5x total household income. That seems quite a lot.

The loan from government is free for the first five years. In year six a fee of 1.75% of the loan’s value is charged, thereafter the fee increases by the Retail Price Index (normally higher than the Consumer Price Index favoured by government for most other measures) plus 1%. This could soon get quite expensive, especially if families expand. And if, on top of all this, interest rates are not markedly higher in six or seven years, in the (possibly apocryphal) words of Margaret Thatcher, I’m a Dutchman.

Assume, too, that buyers will not get quite as good a deal on incentives compared with more mainstream buyers (although builders will not admit to it, they market H2B as an incentive, even though it is entirely paid for by government). Then there is the issue that new homes, like new cars, lose their “premium” the day the key is turned.

The long and the short of it is “hardworking households” may find themselves paying through the noses for “cheap” loans on homes that were overpriced and facing the prospect of their tiny equity rapidly turning negative.

Wednesday, 20 November 2013

The hitch with "hutching up"

One of the most poignant symptoms of a housing market in overload is the phenomenon of young people “hutching up”, as it is now termed. The FT’s front and third pages today exposed the potential social problems of young graduates being forced into hutching up sharing cramped accommodation in London because of rising rents.

The most painful aspect of this has been young couples ending hutched-up almost as soon as they hitched-up. The FT cited the example of Tom Johnson. (People of a certain age may now want to put on the theme tune to Radio 1’s vintage Our Tune): “When Tom moved into a one-bedroom flat in London with his girlfriend, he admits it was partly because he wanted to escape the housing situation he was in. He had been sharing a house with strangers, in a box room that barely fitted a bed and a wardrobe.

“Living in London forces you sometimes to have uncomfortable living arrangements with people you don’t know that you want to get out of,” the 25-year-old says.

“But for that, he and his girlfriend ‘would have left it a lot later’ to move in together – or perhaps not done so at all.

“They broke up about nine months into their cohabitation. In a city where few young people can afford to live alone, his story is an example of the strange things the rental market can do to people’s relationships.

Now, when I were a lad down in the Big Smoke for the first time, it was buying not rental where this phenomenon was most prevalent. In the mid-1980s, with the price of flats in many cases going up by a few percent a month many a young couple would head to an estate agent seemingly a day or so after their first liaison. The situation was exacerbated by Chancellor Nigel Lawson disastrously allowing a six month window to exchange contracts before withdrawing tax relief on couples’ mortgage interest.

Then, the day after it was withdrawn, came the crash. Couples metaphorically woke up, looked at each other, shuddered and thought “what have we done!” But the onset of negative equity meant they were stuck where they were. Friends of a friend ended up so loathing the sight of each other that they had to fix up woodchip panelling in a sort of Berlin Wall across their tiny flat. A true story. Others had to buy out their partners, often acrimoniously.

The current problems are mainly restricted to rental properties, according to the FT. Recent graduates, who are earning less than their counterparts before the crisis, are flocking to the capital - not only because of its undeniable attractions, but because it’s where most of the jobs are – but they are facing huge rent bills. The FT analysed median rents data from Hometrack, the property consultancy, shows a new graduate on an average starting salary of £22,400 can expect to spend more than a third of their gross income on rent – a standard definition of unaffordability – for a room in a two-bedroom property in 72% of inner London postcodes.

Now if some of this grouping are persuaded to apply (and are accepted) for Help to Buy funding could history repeat itself? It would probably be most likely in the first phase, allowing equity loans for new build properties. Critics of housebuilders claim that their products are like rabbit hutches in any case (I’ll not get into that debate). Could Chancellor George Osborne “do a Lawson” and woo innocent couples into homes that are too small for them … and then withdraw the stimulus, thus prompting a price crash? If so, some irate former sweethearts might end up heading to B&Q to order chipboard.

Round-up │ 20 November 2013

In Briefing: (Economic) mortgage lending surges • BoE votes unanimously to keep money cheap, Forward Guidance gets woollier • US architectural billings come off boil

Tuesday, 19 November 2013

Who's faring best in construction's conga?

It’s difficult to avoid thinking of ground engineer Keller and electrical contractor T Clarke as the front and back end of construction’s pantomime horse: one’s going in one direction before the other gets a chance to catch up. Both issued interim management statements today showing stark contrasts in outlook.

Keller, which digs down, props up and prevents leakage of construction projects from the ground downwards signalled a likely “beat” to analysts’ forecasts for the year to December; “Tommy” Clarke, which wires up buildings when they are nearing completion said trading was “in line” but issued the current war cry of probably every subcontractor in the land, “the b******s aren’t paying us on time” (naturally, in language more befitting a stock market announcement).

By about lunchtime Keller’s share price was up precisely 4.48%, while T Clarke’s was down … precisely 4.48%.

Before other UK practitioners along the construction chain get too excited about Keller unearthing green shoots along with everything else it digs up, the British-based group actually does very little in (or under) these shores and most of its improvements in order intake and margins have been down to self-help rather than benign markets.

But two other announcements today suggest grounds for optimism on a macro level. The RIBA’s Future Trends survey showed architects (who presumably hold the reins of the pantomime horse) reporting that the three months to October showed the first annual increase in workloads since the financial crisis. Workloads for the quarter were up 11% on the same period in 2012.

Meanwhile, hybrid housebuilder-contractor Galliford Try, which represents just about everybody in the middle of - let’s now call it - the construction conga, saw an “encouraging start” to the year to June for both businesses. No surprises from its housebuilding side, given the degree of support lavished on the industry from HM Treasury, but even the construction division had seen a 9% increase in orders, an improving pipeline of opportunities and “margin protection”.

The division also achieved “continuing strong cash management” and there’s the rub for companies later in the cycle and further down the pecking order. Such as Tommy Clarke. Now I have first hand evidence that Galliford Try is among the better eggs within the realm of main contractors in terms of payment (other names regularly make the industry’s anecdotal black book). But even the better payers have to preserve their cash and, with material and labour costs bounding back across the industry, smaller companies, those naturally later in the cycle or further down the supply chain may find themselves on the wrong end of disputes for many months to come.

This post appeared on Building's website 19 November 2013

Round-up │19 November 2013

In Briefing: contrasting corporate views from "front" and "back" end of construction chain, while architects see 11% increase in workload│(Corporate) ground engineering specialist Keller likely to beat estimates • electrical contractor T Clarke finds it hard to get money off customers • hybrid housebuilder-contractor sees "encouraging start" to year in both businesses • consultant WS Atkins buys US nuclear security specialist

Monday, 18 November 2013

Round-up │ 18 November 2013

In Briefing: (Corporate) Gladedale, becomes latest Lloyds housebuilding investment to be put up for sale • (Politics and industry) British Bankers Association makes uncharacteristic political intervention, saying Help to Buy risks distorting housing market unless Chancellor states clearly when and how the scheme will come to an end • Firms involved in "blacklisting" have offered workers up to £100k each in compensation • Amnesty International report highlights plight of foreign workers in Qatar, raising prospects of cost hikes.

In the weekend papers

Stamp Duty takings could rise 54% in five years due to house price rises says Hamptons, FT • Rents soar while lenders slash buy-to-let mortgage rates, This is Money •  Home buyers "throwing caution to the wind" to buy "off-plan", Guardian • High house prices mean that almost a quarter of households renting are headed by someone 50 or older, FT 

Friday, 15 November 2013

Week ahead

(Economic) Mainly housing: BoE MPC Minutes, Nov, and CML mortgage lending, Oct (Wed 20), DCLG House Building, Q3 and HMRC transactions (Thu 21) 
(Corporate) Keller IMS (Tue 19) as "front end" ground engineer, a good long range indicator for construction in its global markets  


Round-up │ 15 November 2013

In Briefing: (Economy) MPC member speaks out against 95% mortgages - at odds with government's Help to Buy • positive data on commercial property │ (Industry and politics) Tory backbenchers scupper PM's "garden cities" plans • Europe's tallest residential tower planned for London's Canary Wharf

Round-up │ 14 November 2013

In Briefing: (Economic) Fed Reserve nominee Yellen mounts defence of QE • positive UK commercial property data │ (Corporate) upbeat statements from Taylor Wimpey and WS Atkins  

Thursday, 14 November 2013

Tortoise or hare?

It is interesting to compare the interim management statements from Britain’s two volume housebuilders over the past two days. For Barratt Developments yesterday the message read like “full steam ahead”; for today's from Taylor Wimpey it sounded much closer to “proceed with caution” (see Briefing/Corporate).

Compare Barratt’s reservations per site per week, up 32% to 0.71, with TW’s 0.65, up a more pedestrian 14%. This is not exactly comparing apples with apples; Barratt’s covers the 19 weeks from its June year end, compared with TW looking at the period from January, so for Barratt there is more exposure from April’s introduction of Help to Buy. But the general tenor of the statements diverge markedly.

Barratt’s forward orders stand at 4,514 units since July, up 28%, while those for the UK’s number two rose 13% to 7,557 for the year to date.

Where they appear to diverge particularly is on land buying. Barratt approved the purchase of 121% more plots, while TW did not give like-for-like comparatives. It did however state “we are starting to see early indications of increased competition in some regions. Whilst we do not anticipate a significant contraction in attractive land opportunities over the next few months, the quality and scale of landbank gives us the ability to be very selective when the more competitive dynamic returns to the land market”.

TW appeared reticent on the subject of its selling prices, referring only to “some selling price increases in line with general inflation”; Barratt detailed inflation of 1.5 - 2%.

I’ll bet TW has managed more than that. The statement declares its “disciplined and value focused strategy”. That could possibly seen as code for “we’ll prioritise selling prices over volumes” - a policy it stated explicitly on regular occasions before the industry started lobbying the government for Help to Buy and its now virtually defunct predecessor NewBuy. Ministers expect the quid pro quo to be a big increase in volumes.

Not quite as extreme as Aesop's tortoise and hare fable, but which company’s apparently contrasting strategy is wisest will only become clear dependent on how long this largely government funded boom comes to an end. Three years or more and Barratt will come out smelling even rosier than Taylor Wimpey. A shorter-lived recovery and TW may well be in a better place.


Wednesday, 13 November 2013

Do we know where he's going to?

A minor tweak to Diana Ross's 1975 hit might suffice as the soundtrack to Mark Carney’s second Bank of England Inflation Report. Prior to today’s announcement the weekend press was abuzz with speculation that the Monetary Policy Committee would bring forward the projected date that unemployment would fall to the seemingly all-important 7% threshold that is the main condition for rates to finally start lifting from the historic lows.

And so it was: the probability given for joblessness to hit 7% was intricately calculated to be “around two in five” by the end of 2014 and “around three in five” by the close of 2015. In the August, the odds were adjudged to be some 25% and 45% respectively, according to a ruler I ran across the chart published in that report.

I employed the same ruler, due to lack of access to the Bank’s Kray mainframe, to project that it will hit 7% as soon as Q2 next. Why? According to ONS figures released earlier in the morning, it fell from 7.8% in Q2 to 7.6% in Q3, so joining the dots … (Actually, the unofficial monthly rate for September was 7.1%, so maybe I should have bent the ruler into a downwards curve.)

Furthermore, growth forecasts for 2013 were lifted to 1.6% from 1.4% in August and for 2013 they were raised from 2.5% to 2.8%.

The language employed in the report also points to impending tightening of monetary policy. August’s version opined that “a recovery appears to be taking hold”, while Carney colourfully commented that the economy “is not at escape velocity”.

Fast forward, literally, in economic terms and today’s announcement kicks off with “recovery has finally taken hold. The economy is growing robustly as lifting uncertainty and thawing credit conditions start to unlock pent-up demand”.

But after that the prevarication sets in: “Significant headwinds – both at home and abroad – remain”. These include the always very real danger that the Eurozone will collectively shoot itself in the foot.

There is also the question of inflation. That fell unexpectedly to 2.2% in October and the Bank concluded this would trend below expectations in the short-term.

In the post-report press conference Carney stressed that 7% unemployment was a “staging post for assessing policy, not a trigger”.

That was implicit in the original tenets of Forward Guidance, which Carney imported following his move from the Bank of Canada. Rates won’t rise at least until 7% had been breached and 2016 was deemed to be the likeliest date. But the unemployment factor was stated more blatantly in August and policy explained quite a lot woollier in the press conference.

Could it be that ministers have been bending Carney’s ear rather more forcefully in recent weeks as parts of the economy – particularly housing-related – have gathered momentum faster than anticipated (in no small part thanks to their own Help to Buy policy)? Raising rates soon before the 2015 General Election would be a huge political hot potato Carney may not be too keen to take out of the oven.

Irrespective of this, the markets soon concluded he – or rather the MPC – will have to. Sterling, which had fallen almost two cents to $1.5864 mid-Tuesday on the inflation data, strengthened to $1.6033 as the jobs data and inflation were scrutinised and an early hike was concluded. Housebuilders shares fell by 3 – 5% despite Barratt producing a sparkling IMS that could have been cut and pasted into any of the other sparkling trading statements from rival housebuilddrs that preceded it over the past few days. (US homebuilders shares have performed likewise on rates rise jitters.)

Confused? Possibly. So we might not know much more where he’s going to. The question is … does he?

Round-up │ 13 November 2013

In Briefing: (Economic) BoE Governor Mark plays "will he, won't he" on trajectory of interest rates in MPC Inflation Report │ (Corporate) Barratt IMS strong, helped by H2B • Kier IMS positive on most fronts but public payments "challenging" • Kier to start work on Hinkley nuclear plant next year • big contract wins for Balfour Beatty and Galliford Try

Tuesday, 12 November 2013

Get 'em young

It was hard to avoid grimacing for Toni Stott on last night's Panorama, dedicated to the government's Help to Buy scheme. A 25 year old primary school teacher from Oldham, earning £30,000 a year, she took the Beeb round her £125k newly built home, positively bubbling with excitement.

The homes, which had been built by Countryside Properties, "had gone up quite quickly and had gone quite quickly," said Stott.

Without the first phase of H2B, which requires only a 5% deposit, and is only available for newly built homes, Stott conceded she would have had to wait "a long time for it to happen". (Not a bad thing, more mature souls might have observed.)

But the toe-curling moment came when the interviewer asked her what would happen should rates go up. "Are you aware that interest rates are have never been so low?" "No (laugh)". "Not for hundreds of years?" "No (another laugh)". You're not aware that this is a really unusual situation ..." "No (yet another laugh)".

Another blissfully naïve sounding interviewee was interviewed yesterday on Radio 4's The World at One, on her way to meet PM David Cameron to celebrate her purchase under the second phase of H2B, also available for secondhand homes. Even if rates went up two or three times, the home "would still be mine" she enthused breathlessly. Errrr, not so sure that holds.

Back on Panorama, abrasive new housing minister Kris Hopkins railed against "cycnical" views that the only people supportive of it were politicians and housebuilders (a view I have put more than once). Well, it looks like even politicians on the right may not be supportive. The head of research at the stalwart of the right, the Adam Smith Institute branded H2B as "essentially a political scheme to buy votes".

On that basis a "buy now, pay for it later" offer to the electorate. Caveat emptor (a clause that may not have been fully made clear to Ms Stott).

Round-up │ 12 November 2013

In Briefing (Economic) RICS housing survey price balance hits 11 year high as stocks get squeezed • First buyers' loan to income ratio hits 2007 peak and buy-to-let lending continues to surge, says CML • (Corporate) former Balfour Beatty CEO to chair housebuilder Bovis

Monday, 11 November 2013

Round-up │11 November 2013

In Briefing (Economy) Further evidence that UK interest rates will rise quicker than Bank of England had forecast • (Corporate) Redrow shows impact of Help to Buy but slams planning • Hammerson bullish on Retail • (Politics & industry) Lots pro- and anti- Help to Buy

Canadian froth: blame it on the guvnor?

"Canada's housing market teeters precariously", proclaims a headline in today's FT, predicting a "prolonged correction". Over-borrowing, over-building and an epoch of low interest rates have led to house prices being over-valued by 60%, at least according to OECD computations.

All very interesting, but a little esoteric for UK readers, perhaps? It might have been except for the fact that all this apparent frothiness developed largely on the watch of current Bank of England Governor Mark, who held the same post at the Bank of Canada for five years until jumping ship this June (possibly the banking world's first example of One Man, Two Guvnorships).

Carney is credited with steering the country, relatively unscathed, through the financial crisis. But the flipside of the long period of low rates, which was part of the remedy, is that household debt has stretched to new highs (despite surprisingly interventionist policies last year towards the end of his tenure).

Will Carney tighten the grip on asset inflation quicker this time? Perhaps. But the trigger is likely to be jobs rather than house price growth. His first act at Threadneedle Street was to set a 7% unemployment rate as the most visible feature of his "forward guidance" approach to rates policy. Then he indicated it would take three years to fall to this level - a view almost universally dismissed by the markets, which see an earlier start to tightening.

The Sunday Times yesterday predicted he will bring this forward at Wednesday's BoE inflation report. This view will be bolstered by today's survey of 1,000 employers by the Chartered institute of Personnel and Development, which showed the UK's short-term job prospects at its most positive for five years. Prepare for a possibly marked change in tone on Wednesday.

Friday, 8 November 2013

Round-up │8 November 2016

In Briefing: (Corporate) Bovis accelerates growth strategy • Balfour Beatty lands Singapore rail contracts • (Industry and politics) cost of initial HS2 design work 11% over-budget

Could Volde-mortgages spook US recovery?

I've a simple rule of thumb regarding housing markets, the US in particular: if a person of moderate intelligence (a category I think I just about scrape into) struggles to understand the mortgage-based products associated with that market it's probably bad news.

A few months before the US market hit its last heady peak I read on Reuters a list of almost a dozen exotic and almost incomprehensible mortgages that looked straight out of Harry Potter's Guide to Derivatives. And felt very worried. These magical products allowed people that clearly did not possess two brass knuts to rub together buy hugely inflated homes. Unbeknown to most observers, however, legions of Voldemorts within investment banks were busy slicing and dicing these into respectable looking mortgage backed securities that were soon to unleash their dark powers across the world's financial systems.

In recent days, the FT has been reporting on "novel" mortgage securities: "Reo-to-rental" (securities backed by rentals from foreclosed homes), which have, in their first manifestation, been granted "Triple-A" endorsement by ratings agencies; "M-Reits" (mortgage real estate investment trusts that invest in packages of mortgage-backed bonds), which have attracted the scrutiny of the IMF, on the basis that even a modest increase in rates could spark fire sales of the bonds, which would, in turn, raise mortgage rates sharply for consumers; and, overlaying both, the return of "slicing and dicing".

"Barring another recession, we find it hard to imagine how a relative flood of deals won't happen in the next year or two," said analysts at Deutsche (which helped structure the first Reo-to-rental deal). Funny, but wasn't it similarly innovative products that helped cause the last recession?

On fundamentals, the US housing market looks more robust than our own, based on demographics and the fact that prices were allowed to reach a natural level (their politicians do not share the obsession of ours with artificially supporting or stoking prices). But dark, external forces could make the whole recovery go up in a puff of smoke.


Thursday, 7 November 2013

Round-up │7 November 2013

In Briefing:  (Corporate) Morgan Sindall trading "in line" but ominous signals for sector on construction costs

Wednesday, 6 November 2013

Foxtons pulls its punches on London outlook

London is supposedly the hottest housing market in Britain and supposedly no one knows it better than Foxtons, the capital’s estate agent über alles. So stock market observers may have been perplexed at seven this morning with the remarkably circumspect market comments of the newly-IPO’d group’s maiden IMS.

The group remains confident about prospects for the rest of the year, to December (it would be astonishing if it didn’t, having floated only several weeks ago): total turnover was up 18%, with revenues from property sales 29% higher.
But the group, which is focused overwhelmingly on the capital and its environs, did “not expect to see a significant upturn in London property sales transactions”.
A bit strange given the view expressed by many observers ahead of the float (myself included) that its focus on the (supposedly) flourishing London market was Foxtons’ Unique Selling Point.
Transactions, the statement explained, have “remained relatively flat due to a shortage in the supply of property for sale and low mortgage availability”. Furthermore, “it remains to be seen whether the Help to Buy initiatives and early signs of a pick-up in mortgage activity ultimately lead to a significant increase in market volumes but these dynamics are expected to materialise slowly".
There was also a hint of reticence about margins. EBITDA margins for the nine months to September were up to 36.0% from 33.2% a year ago, reflecting the operational leverage associated with the higher revenue so far. But margins for the final quarter would be lower, reflecting two new branch openings, at Crystal Palace and Twickenham (along with the attendant Minis) and the “higher on-going costs of operating as a listed company”.  There was no “granularity” on how the margins had progress during the three quarters so far this year.
Shares dipped by over 5% following the statement but recovered ground by midday, suggesting management had soothed any concerns. But with shares up 37% since the IPO in September, investors will be keeping their fingers crossed that the tone of the next statement more faithfully reflects the ebullience of the group’s flashy sales offices and racy Minis.

Round-up │6 November 2013

In Briefing: (Economic) Halifax reports accelerating house price inflation • brick stocks down a third, prompting cost inflation pressures • (Corporate) Persimmon sees sales, margins and production grow • Foxtons' maiden update questions London bonanza assumptions

Tuesday, 5 November 2013

Strewth! Problems Down Under for Balfour Beatty

First the good news: the overall construction, services and PFI group will beat analysts’ expectations for profits in 2013. Now the bad news: a bigger than expected (£34m rather than £24m) dent to those profits from Australian operations (due to falling volumes and deteriorating prices) will only be offset by greater than expected receipts for sales of PFI equity stakes and next year the group’s Antipodean operations will experience continuing difficulties.

The European construction groups’ travails remind me of a recent “Colemanball” from a Radio 5 Live football commentator, “once again and not for the first time”. Groups from the northern hemisphere with Australian interests have, for as long as I remember, been taken for a roller coaster ride by their Aussie cousins. A typical pattern is seven or so years of plenty before the earnings famine strikes, not only at an economic level but, more worryingly, at a systemic, operational level.

Mowlem, Laing O’Rourke, Bilfinger Berger and Hochtief are among the groups that have exemplified this pattern. Why? One reason is the construction market and wider economy is like Henry Wadsworth Longfellow’s Little Girl: when it is good it is very good indeed, but when it is bad it is horrid. The economy is hugely geared to natural resources and has generated even more wild swings in commercial and residential activity and values.

Another factor, though, supposedly more under the control of the groups, is their own management of their subsidiaries, particularly regarding contractual controls or legal disputes. The naughty child analogy again emerges. And - how shall we put it? - the more strident aspects of the Australian persona. The German for subsidiary is tochter, literally “daughter”. An exasperated contact once conveyed to me the following in clipped Teutonic tones after another black hole had been uncovered: “They [the Australian management] started acting like a teenage daughter. They vanted to do everything their own vay.”

A common feature in all the cases I can recall has been a combination of cost controls becoming lax during booms and legal disputes, often due to poorly written contracts.

Taking local management at their word has not always been advisable. And being half a dozen time zones away is a significant handicap. It can take a whole week of toing and frowing by phone or email before European central command actually gets something approaching a realistic picture. And then it takes two days of organisation, flying and jet lag to get senior management to the other side of the world, by which time the locals may have dug themselves into an even bigger hole.

Balfour has a good record of tackling problem overseas divisions, albeit often taking a few years. Others have not been so hands on. One senior director sheepishly conceded to me many years ago that his company had taken what amounted to a “don’t ask, don’t tell” approach: “they were so good for so long, we stopped looking”.

This first appeared on Building's website on 5 November 2013

Monday, 4 November 2013

Say AAA!

A shiver of Déjà vu ran down my spine when I read in the FT today that private equity giant Blackstone will this week be offering investors a "novel security", a $479m portfolio of over 3,000 foreclosed homes, backed by the cash flow from rents.

Novel? Hmmm. It sounds faintly reminiscent of the legions of homes (possibly many of them the same ones) that were packaged, sliced, diced and fricasseed into bold new financial products ... that eventually took the world down with them in the last boom.

The bonds are priced at “low to mid 100 basis points” over swaps, "people familiar  with the deal" excitedly told the FT. And, in another blast from the past, three ratings agencies including Moody's seem happy to slap AAA ratings on the most senior $279m slice of the securitisation, a move that the FT reported was greeted with surprise by some market participants who thought a single A was the best that a non-tested product of this type would likely command.

Moody's justified the triple-A by stressing that Blackstone would be able to sell its properties if tenants stopped paying their rent. Others murmured that it would be hard to liquidate such large portfolios in the case of widespread defaults or voids

Now this product clearly sounds a lot more plain vanilla than some of the more exotic financial weapons of mass destruction that marked the heady last days of the Noughties boom. But, on hearing Moody's view, I can't quite get the words "heard that one before" out of my head. 

Round-up │ 4 November 2013

PM David Cameron says incoming HS2 chairman Sir David Higgins's first task will be to examine ways of cutting the £50bn overall estimated cost of the north-south rail project, BBC • Blackstone tests market with $479m security backed by cashflow from over 3,000 ex-foreclosed rental homes; senior slice given AAA rating by three agencies, FT • Amec acquires US nuclear design services consultancy Automated Engineering Services Corp for $29m

Saturday, 2 November 2013

Help to fly? Agents to gain most from government largesse

Preaching to the converted? I got more re-tweets for my fairly flippant Twitter post (@BuildInsight),  “Notice that just about the only people (outside Downing Street) thinking Help to Buy is sensible, are estate agents and housebuilders?” than anything else I have mustered in the few weeks since I first delved into the Twittersphere.

I was prompted by estate agent Countrywide’s assertion in its Interim Management Statement that Help to Buy is “a credible and well thought out policy which will benefit the whole of the UK housing market”. Similar missives have flooded out from the housebuilders ... but virtually no other quarter.
Ironically, the two camps, estate agents and housebuilders, want very different outcomes: for agents it is transaction volumes above price increases that most boosts profits; for the builders, the opposite holds.
For agents, the more transactions the merrier, even if that means not holding out for the last few percent of the client's asking price. September’s data from HMRC showed a 28% year-on-year increase in UK housing transactions, reflecting the delayed impact of Funding for Lending rather than the second phase of Help to Buy which was just about to kick in. A finger-in-the-air projection for the combined impact of the two schemes, when the both get going? I’d say an increase of about 40% to 50% over 2012 transaction levels.

Staff numbers and the odd office location are the main downside for estate agents when, or indeed if, Help to Buy runs its full term in 2016.  Employment in the “Real Estate Activities” section of the ONS Labour MarketStatistics showed a 16% annualised rise in the latest release, far outstripping any other industry sector.  What goes up can go down. For staff that are paid primarily on commission, overheads can shrink to fit reduced sales levels.
For housebuilders, it is far trickier. Price has a far higher impact on profits than sales volumes - which most developers are rarely comfortable eking out much more than 0.75 units per outlet per week, for fear of overstretching themselves and, dare it be said, de-stabilising local pricing.
The real fear in pursuing headlong growth in hot markets, however, is getting caught, as it were, with their pants down, by purchasing too much land at the wrong price and with runaway overheads. The pain of land writedowns, with their impact on banking covenants is still fresh in the memory.
So growth in housing starts could be more measured than the government has bargained for. An eventual run rate in 2014/15 over and above the low levels of 2012? About 30 - 40%, of which about half of which was already in developers’ plans before the largesse of Help to Buy, the first phase of which was available as equity loans for new build solely.

As for the second phase, it seems to have got off with what looks like unseemly haste. The FT reports that the first home bought under the 95% mortgage guarantee scheme - a two-bedroom flat in Dartford, Kent, for £153,500 - was completed on Wednesday, a mere 12 days after Halifax launched its product, rather than the six to eight weeks more commonly experienced. “A number” of other applications are nearing completion, according to parent group Lloyds.
In the secondhand market, agents are likely to make hay as the sun shines, with relatively limited downside to company balance sheets, hence Countrywide’s enthusiasm. For housebuilders, despite their protestations of support, Help to Buy represents something of a double-edged sword and they are likely to proceed with more caution than ministers are hoping for.



Friday, 1 November 2013

Round-up │ 1 November

MPs vote ten to one in favour of the High Speed 2 (Preparation) Bill, which releases funds to pay for surveys, buy property and compensate evicted residents, Construction Enquirer • Chancellor George Osborne considers Capital Gains Tax for foreign buyers to take heat out of London housing boom,   Telegraph. Osborne refuses to comment on Radio 4 Today programme, ahead of the Autumn Statement in December • Research by EC Harris finds that the "Build to rent" housing model is viable in over 50% of English local authorities, despite rising land prices, Building. But four-fifths of these are outside London, Building.