The sector today

What is the state of housebuilding today? With the market clouded by uncertainty, government setting new challenges in areas from planning to building regulations and the industry's big names jostling for top slot, that question has seldom been more pertinent. At Building’s Future Homes convention, which took place immediately prior to the Building Homes Quality Awards in London on 12 October, the industry had an opportunity to debate and discover some solutions. One of the highlights of the conference was a presentation based on the content of the newly published Private Housebuilding Annual 2004, written by industry expert Fred Wellings. The annual, published by Building in association with RSM Robson Rhodes, gives the lowdown on more than 100 of the UK’s leading housebuilders, as well as market comment, in-depth financial analysis of the top players and insight into the industry's changing structure. Here's a glimpse of what Wellings has to say about the market, and the league table of 2004’s top housebuilders

The market

The “no recession” case has always rested on the twin arguments of the affordability of the product in times of low nominal rates of interest, and on the structural shortage of housing. To start with the first of these two arguments, the affordability issue remains hard to evaluate, for the historical benchmarks drawn from a high-inflation era do not necessarily translate into appropriate guidelines for the contemporary low-inflation, low-interest era. As shown in the graph below the Nationwide house price–earnings ratio peaked at 5.00 in the second quarter of 1989, almost identical to the 4.89 peak in the first quarter of 1974. Both housing booms were broken by exceptionally high interest rates (13% and 15% respectively). In this boom, the house price–earnings ratio has gone well beyond anything seen in the past, and the Nationwide ratio is now 5.8. For all that economists correctly point to the real cost of borrowing in a period of low inflation, a rise in nominal interest rates from 3.5% to 4.75% has not (yet) had the same effect on house prices.

The graphs below show the latest rise in the house price–earnings ratio compared with the 1974 and 1989 peaks, and the more recent growth in house prices, which have trebled since 1995. Nevertheless, there does appear to be a general acceptance that the housing market cannot continue in this vein and the debate has shifted to whether there will be a levelling out or a fall. Hardly a day passes without the media headlining the latest statistic or report “proving” the opposite of what had been “proved” the day before.

The housebuilders’ view

The quoted housebuilders used the June period-end statements to indicate that trading remains satisfactory, but this is coupled with what could be taken as an orchestrated message to the Bank of England not to further increase interest rates: “Following successive interest rate rises in recent weeks the market has now steadied to sustainable levels” (Wimpey); “The recent increases in interest rates have dampened the level of price improvements to one that is more sustainable” (Bovis); and “following recent increases in interest rates, the market has been returning to normal conditions over recent months” (Barratt).

The housebuilders’ views cannot be dismissed lightly for the housebuilders are far closer to the customer than any of the statisticians or commentators. Yet one could find similar comments emanating from the industry in 1988. In their heart of hearts, housebuilders themselves cannot believe the level of profits is sustainable – why else would they be distributing only 20% of their available profits?

Overall trading may well have been strong to date during 2004, in that there has been a steady flow of buyers paying ever-increasing prices for the limited product that is on offer. However, the most worrying aspect of the housing market is the extent to which potential buyers are being priced out of the market. According to the Council of Mortgage Lenders, the proportion of loans taken by first-time buyers over the past three years, as illustrated by the graph above, has fallen sharply. Without a solid base of first-time buyers, the rest of the market cannot function.

The players

There are, as usual, several departures from the previous year’s top housebuilders league table. Wilson Connolly and Prowting both succumbed to takeovers. Since 1997, eight housebuilders building 1000 units apiece, have disappeared from the table. There have also been some name changes. Taylor Woodrow has completed the rebranding of all its UK housing as Bryant following the latter’s acquisition in 2001. Fairclough Homes has separated out its southern subsidiary under the name of CDC2020, and both are now listed under its parent Centex (UK).

At the highest reaches of the industry, musical chairs continued with Barratt leapfrogging over Wimpey and Persimmon to regain the number one position it last held in 1985. Barratt had pushed volumes ahead by more than 1000 units, whereas Wimpey and Persimmon’s volumes were slightly lower – perhaps profits were rising fast enough not to need higher output. Preliminary indications are that these three will be in the same order this year. With Wilson Connolly being taken over, Miller Homes entered the top 10 for the first time, consolidating its position as the largest privately owned housebuilder by unit volume, although it makes less profit than Bloor.

Extending the list to the top 20 brings in housebuilders with volumes ranging from 1300 to 2500; within that range, it does not take much variation in output to change the order, but McCarthy & Stone has moved up from number 18 to 12. Willmott Dixon has also entered the top 20 for the first time following a substantial increase in its social housing output.

However, the biggest change has been at Gladedale, following its takeover of Furlong and then Bett Homes. The speed with which Remo Dipre has expanded the company, which did not start trading until the end of 1997, has been remarkable and owes much to financial support from the Bank of Scotland. There must be bankers wishing they had given him similar support when Fairbriar ran short of funds in the last recession.

Top 20 housebuilders – a comparison

When the top 20 are listed in order of their UK housebuilding turnover (overleaf) for financial years ending in 2003, the names are not substantially different from the top 20 by unit numbers (below). However, they do more correctly reflect the different mix of product, from social housing to executive homes, and from the North-west to the South-east.

Using turnover instead of units, Wimpey rather than Barratt becomes the largest UK housebuilder; Berkeley and Crest move up a few places reflecting their south-eastern orientation, as does Linden, which is in the top 20 by turnover but not by units. In contrast, retirement homes specialist McCarthy & Stone is a few points lower than its volume ranking. McCarthy & Stone is, however, back in the turnover top 20 after an absence of many years and is joined by the recently formed Gladedale Homes; they replace Prowting and Wilson Connolly, which have been taken over.