city SHOWHOUSE with David Smith
For Britain’s housebuilders, the past few weeks have been a roller coaster. Their shares, one of the darlings of the stock market in the past few years, appeared immune. The
housing market had come back from the dead, and so had they. Anybody buying Taylor Wimpey at the low point in November 2008, and probably not that many people did so, will have seen the value of their shares jump by 900% over five years. There has been a similar, if generally slightly less dramatic story from Barratt Developments, Bellway, Berkeley, Bovis, Crest Nicholson, Persimmon and Redrow. One of the most bombed-out sectors of the stock market became one of the strongest. Shares in the builders benefited, not just from their sheer survival – faced with the biggest collapse in mortgage availability in living memory – but by government efforts to get the market moving. However, the story of 2013 was, in many ways, one of deep scepticism about such efforts, giving way to fears that the government is stoking up an unsustainable boom. It was those fears that led to the biggest setback for investors in housebuilders for a long time. When Mark Carney, the new governor of the Bank of England, unveiled the Bank’s latest Financial Stability Report, in late November, the event was probably not uppermost in the minds of most builders. Carney’s actions and words were, however, important. Concerned about the risk of a runaway housing boom, he announced a series of measures to cool things down. The Bank, he said, would ensure mortgage lenders were maintaining high underwriting standards. More importantly, he announced a significant shift in the Funding for Lending Scheme (FLS). As he put it: “The Funding for Lending
20| January 2014 showhouse
IN THE CITY
Scheme will be refocused towards supporting business lending starting next year [2014]. Since the FLS was launched, it has contributed to a substantial fall in bank funding costs. 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. Instead, the FLS extension will only generate additional allowances from new business lending, with incentives heavily skewed towards lending to SMEs.” This was unexpected, and the effect was immediate. That day, 28 November, there was a
sell-off across the housebuilding sector, with Barratt Developments down 9.6%, Taylor Wimpey 7.8% and Persimmon 6.3%. Other housebuilding shares also sold off sharply, though most recovered at least some of the lost ground. If you wanted to be pessimistic about housebuilding, you would say that the episode underlined the sector’s dependence on official schemes. If the mere announcement of the scaling back of one of those schemes can do so much damage, how long will it be before housebuilding can survive and thrive on its own? That, however, seems too gloomy a view, and the market reaction was excessive. It may have been that, after an exceptionally good run, shares in the builders were due a correction. The important thing is to look at what Carney was actually saying. What he was saying was that household lending, most of which of course is mortgage lending, did not need the support of the FLS. That, perhaps, is not surprising. All the attention in recent months has been on Help to Buy, both the equity loan scheme for new homes launched in April 2013 and the scheme for existing homes, now in place, but which will begin to flow in earnest this year. With those schemes in place, both for new-build and second-hand, FLS had taken a back seat. Even for mortgage lending outside Help to Buy, the evidence was that home loans were gathering their own momentum. The latest monthly Bank of England figures for mortgage approvals, 67,701, were the highest for nearly six years. That said, it would be wrong to dismiss Carney’s actions. They reflect a determination not to let the strong upswing in housing get out of hand. In the past that would have been done by raising interest rates but the new governor is determined not to do that. His policy of so-called forward guidance – linking the next move in interest rates to the unemployment rate (the monetary policy committee will not consider a rate hike until the jobless rate falls to 7%; as of December it stands at 7.4%) – means that he will be looking to cure any housing excesses by other means.
These, known in the jargon as macro-prudential measures, are the preserve of the Bank’s financial policy committee, not its monetary policy committee. It is this financial policy committee which might, at some stage, recommend that Help to Buy is wound down, having been given that responsibility by George Osborne. There is good news and bad news in this. To begin with the bad, it is quite likely that there will be other measures from the Bank, over time, to curb what it sees as risky mortgage lending. Those pronouncements from Carney will deserve keeping an eye on.
The good news is that the governor intends to hold off for as long as he can before raising interest rates, something that really would hurt the housing market. In the end, Carney’s aim is to maintain the housing recovery, while at the same time avoiding boom and bust. That is not a bad aim to have, and one that is surely in the interests of housebuilders and investors, the recent turbulence notwithstanding.
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David Smith, the economics editor of The Sunday Times, is the new City correspondent of Show House
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