Why housebuilders’ share prices are sinking – despite healthy industry profits
If you quickly skim over the financial results of any major residential home builder you would presume that business, for the most part, is doing quite well.
Just last week a flurry of housebuilding companies revealed their earnings for 2022 with major players in the market such as Persimmon and Taylor Wimpey seeing profits of £731m and £800m-plus respectively.
While this surge in revenues would traditionally hike the share price of a company up, this appeared not to be the case as shares in these companies slumped to new lows after a number of damning reports on the outlook of the housing sector shattered investor confidence.
After Persimmon announced its final year results shares in the group slumped 9.54 per cent, and Taylor Wimpey’s fell almost five per cent.
In their outlooks for the year both firms have appeared to put on brave faces and said they are “looking forward” to the year ahead – but with mortgage approvals slumping to the lowest levels since the 2008 financial crash the market is questioning what really lies in store for them.
While it may be in the sector’s best interest to remain hopeful, Nationwide’s House Price Index also revealed that properties dropped in value by 1.1 per cent year on year in February.
Furthermore, some four in 10 (41 per cent) homes currently listed for sale on Zoopla have had their asking prices reduced to attract buyers – pushing investor confidence to new lows.
“While 2022 proved to be a fruitful year for homebuilders following a malaise during the height of the pandemic, the outlook for this year isn’t as optimistic given the challenges faced by buyers struggling with higher mortgage rates and rampant inflation,” Myron Jobson, senior personal finance analyst, interactive investor, told City A.M.
Furthermore, Jobson said that homebuilders are also facing “higher costs” from shortages of both materials and labour due to the economic crisis.
“Against this backdrop, tightening of cost and the reduction of land purchases could be on the cards for some homebuilders,” he said.
While soaring inflation may be one issue for the residential market, Harry Quartermain, head of research and insight at LandTech, also warned that the sector is facing a “perfect storm” of long and short term factors that will make housing delivery more difficult for the year.
According to Quartermain a cluster of issues such as ongoing supply-line and skills shortages have made build-costs higher and “chronic under-funding” in the planning system has caused delays to the granting of planning permissions.
On top of this, the researcher said that recent revisions to the government’s National Planning Policy Framework (NPPF), which sets out government’s planning policies for England, has created “additional uncertainty for local planning authorities”.
It comes as earlier this year The Levelling Up, Housing and Communities (LUHC), announced that it was looking to make changes to the framework with many in the industry worried it would further reduce the amount of homes and infrastructure delivered across England.
He explains: “The outlook for the next 12 months will depend on how the government responds to the feedback that they have received in relation to their NPPF consultation. In response to this consultation, the industry has been overwhelmingly negative about the majority of the reforms proposed. Time will tell what the government does with this information.”