Storm clouds ahead for buoyant housing market

The housing market is widely predicted to be on the verge of collapse, yet many businesses relying on the sector are in a foolishly bullish mood, says George Pitcher

As the most famous story of homelessness in the history of the world starts to be re-told again – the one involving a pregnant woman in Bethlehem – perhaps it’s more than a little appropriate that a good deal of attention is turning to the prospect of people losing their homes.

Interest rates are on an upswing – and we can expect more in the way of increases around Chancellor Gordon Brown’s Budget in the spring. Combined with ludicrous overstretching of domestic budgets to meet mortgage criteria – especially in the South-east, where property-ownership can mean a multiple of four or five times salary – a burst bubble of negative equity and repossession makes for a less than prosperous New Year.

At a notional 4.25 per cent, a 0.5 per cent rise on the level prevailing last week, Bank of England base rates would put the number of mortgages in arrears at somewhere near the 200,000 mark, according to finance consultancy Capital Economics.

It adds that any consequent fall in house prices would push about 300,000 households into negative equity by the end of 2006.

This would still be a considerably better position than the housing crash of the early Nineties, when more than 1 million homes experienced negative equity.

We are constantly told that the economic world is a different one today. We still have relatively low interest rates and levels of unemployment. And the implication also is that we don’t have a government of complete buffoons.

But it is still a worrying sector, made all the more alarming by the thought that it is the housing market that very substantially holds up our consumer economy. A housing collapse will very quickly be followed by a high street collapse. Retailers are not so much living on borrowed time, as borrowed money.

Against this background, it really is extraordinary to find that there is bullishness and confidence on the part of companies that depend on the housing market for their prosperity. Not only are houses economically built on sand, but some of those whose livelihoods depend on this market seem to have buried their heads in it too.

Last week, for instance, estate agency and property consultancy Savills brought forward a trading statement by about a fortnight, because its strong performance had pleasantly surprised even its own executives.

With no sense of irony, Savills indicated that it will report a bumper year for 2003, having “performed better than expected in the second half”. Pre-tax profits will “materially exceed current market expectations” and the Savills board – wait for it – expects to recommend a “significantly increased” final dividend. Savills’ shares rose 40p to close at 295.5p last week.

That’s okay, then. The housing market may be teetering on the edge of collapse and hundreds of thousands of mortgage borrowers may face foreclosure by their lenders in 2004, but Savills’ shareholders can enjoy an increased dividend because they had a good year in 2003.

Perhaps Savills’ performance came principally from commercial property and fortuitous investment in property investment funds? Well, no actually. The strongest divisions at Savills are residential property and – this is the breathtaking one – its mortgage broker.

I don’t expect that shareholders should not make hay while the sun shines on the residential property market, but one might expect a degree of caution with regard to the heavy weather on the horizon.

Savills is not alone. I note with interest that a specialist domestic-property developer is coming to the AIM market, with a flotation that will raise £13.5m and value the business at £50m. City Lofts builds apartments for what we used to call yuppies, in post-industrial conversions in regional city centres, such as Leeds and Manchester.

I wish its new shareholders well in the public markets. Presumably they can look with confidence to a growing investment in a company that depends on young professionals in the 20- to 35-year-old age group continuing to be able to borrow and to service mortgages calculated on multiples of many times their incomes.

It may be that the likes of Savills and City Lofts have well-planned strategies for how to prosper during a prospective downturn. But I suspect that a traditional strategy will suffice – it will be a familiar tale of repossessions and resales, hoping that the sheer volume of churn at reduced prices will replace the high margins of the good times.

Callous as it may sound, my concern is not so much with home-owners. In a free-market economy, they have a responsibility for not taking on loans that they can’t service in a changed economy. My concern is with shareholders in these property companies.

It is said that in a downturn, property lenders are more concerned with shareholders than with borrowers. That is a truism. But I would suggest that the two depend on one another. It might serve shareholders’ best interests not to pay a raised dividend at the end of this year, for example, but to hold cash on the balance sheet that may prove handy in riding out the downturn.

It might also assist the image of such companies, which shareholders know is a factor in share-valuation. It would be good if, next Christmas, property companies were not having to turn people – pregnant or not – out of their homes.

George Pitcher is a partner at communications management consultancy Luther Pendragon

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