It is customary for the UK housepricesto see a seasonal summerslowdown, but there was little sign of that in the currentoverheated property market.
Prices leapt 3% between June andAugust, Halifax reports, and says the lack of a seasonal slowdown points towards strong autumn sales as well.An excess of demand oversupply is the main reason, and while that is bad news for first-time buyers, it isyet moregood news for housebuilders.
Shortage of property supply spell busy times ahead for Barratt Developments (LSE: BDEV), Persimmon (LSE: PSN) and Bovis Homes Group (LSE: BVS). All three companies have thrashed theFTSE 100 this year. While the index fell 8%, Barratt leapt72%, Persimmon grew 56% and Bovis grew 30%. Over five years the FTSE 100 returned 13% but these three builders soared278%, 423% and 177% respectively.
The supply/demand equation is balanced firmlyin favour of housebuilders.The truth is they cant build homes fast enough. But is this favourable mathematicssustainable?Three factors could hit demand over the next few years.
1. Rates Will Rise
Record low mortgage rates have also helped to turbo-charge demand but they wont stay lowforever. At some point the Bank of England may finally act, and that will hit buyer sentiment. Yet the fatefulday is regularly postponed, and even if rates do gradually rise, they will remain extremely low by historical measures.
2. Affordability Is Stretched
In 1995, the average earner spent between 3.2 times and 4.4 times their salary on a house, depending on where they lived, according to figures fromThe Guardian. By2012-13, the last year for which complete data is available, that had soaredto between 6.1 times and 12.2 times regional incomes. And prices have only shot upsince then. Yetother figures suggest that onceyou take into account cheap finance, property remains historically affordable.
3. Buy-to-let Tax Crackdown
The buy-to-let market continues to boom as amateur landlords drive prices higher.Buy-to-let mortgage numberssoared 39% to 25,200 in the year to July, and14% on June. The onlycloud is Chancellor George Osbornes forthcoming tax crackdown, which will gradually phase outhigher rate tax relief from 2017. This could cost small-scaleamateur landlordsup to 2,000 per property a year, although largerinvestors can get round it by setting up a limited company. Buy-to-let should still battle on.
The Supply Side
These three factors willtake some of the heat out ofthehousing market, and there are early signs of cooling in red hot prime central London, due to sky-high prices and costlier stamp dutyat the top end. But even if UK demand does dip, supply shortages will continue to rage.
Just 125,110 homes were built in England in the year to March, but we need at least double that number. The National Housing Federation says there is now a shortfall of 500,000 homes. Cuts to housing associations budgets will only worsen the new-buildshortfall.There arent enough trained bricklayers, carpenters and joiners to build them, as a quarter of a million quit the industryafter the financial crisis. Barratt, which builds more than 14,000 houses a year, says the sluggish planning system is an even bigger obstacle.
The supply/demand equation will continue to deliver the same answer: Britain needs to keepbuilding. This suggests the sums willcontinue toadd up forBarrett, Persimmon and Bovis Homes Group.
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