The plight of housebuilders – is it all about Brexit?

November 5, 2019

Ekra Mir, investment associate at Jesmond-based independent stockbroker Vertem, looks at FTSE 350 housebuilders and asks if Brexit is the only issue impacting their share price

Of the many aspects of the British economy that have suffered from the prolonged debate and delay to Brexit, it is becoming clear that the daunting decision of buying a house has been critically affected. The political whirlwind has caused multiple

pauses across the UK as Brits find themselves ‘waiting for Brexit’ to happen before they make spending decisions, but one of the most significant purchases of most people’s lives – buying a house – has clearly been severely impacted.

September has typically been a month where house prices nudge up. Or it has been for the past nine years until 2019 when the average price for houses up for sale has fallen by 0.2 per cent, according to estate agent Rightmove, as sellers struggled to entice the Brexit-cautious Brits.

But, that grim news appears not to have had the same impact on the housebuilders that make up the list of FTSE 350 companies in the household goods and home construction sector.

During the three-year and four-month period when the UK public decided to leave the EU from the beginning of June 2016 up to the beginning of

October 2019, only three of the housebuilders that make up the FTSE 350 home construction sector experienced a drop in their share price, while the remaining seven gained.

Crest Nicholson, Taylor Wimpey and McCarthy & Stone are among the few whose share price has suffered since Brexit. But is Brexit the cause of their shortcomings or is the market exaggerating the risks which UK housebuilders face in the run-up to Brexit? This is in turn putting additional pressure on their share prices instead of focusing on any improvements they make and magnifying their struggles.

McCarthy & Stone’s share price took one of the biggest hits to a record low in June 2018 following a trading and strategy update. This revealed an obvious decline in reservation rates due to the Brexit pause mentioned earlier, but also due to the slow secondary market, which the group’s business structure depends on as it waits for potential house-buyers to sell their existing homes before moving. Maybe there is a flaw in their method of operation, as well as Brexit-related pressures?

One of the seven companies that have been able to dodge the Brexit-bullet is Persimmon, and in early 2019 it became the first among its peers to deliver annual pre-tax profits over the £1 billion threshold. However, its success came into play long before Brexit; its saviour goes by the name of George Osborne, former UK Chancellor.

The Help to Buy Scheme implemented by Osborne back in 2013 – which in 2018 accounted for circa half of Persimmon’s sales – has undoubtedly given life to what was a troubled sector following the recession. However, the scheme has also been massively criticised for not being more exclusive with regards to who was eligible to use it, as it was revealed that a lot of people, who were more than capable of buying homes without help from the Government, took advantage of it.

Regardless of the criticism it received, whether you were wealthy or genuinely in need of the Help to Buy Scheme, it seems the real winners were indeed the housebuilders, and it shows in their share prices from 2013 onwards.

In 2019, housebuilders constantly seem on edge and appear to be faced with a growing number
of issues to reflect upon when looking into the market and one of those focal points is stamp duty. Housebuilders experienced something of a boost recently, after having a difficult time dealing with Brexit, when news surfaced describing the new Prime Minister’s plans for stamp duty.

Boris Johnson has discussed plans to reverse the stamp duty on homes with a higher value, which was gradually increased between 1997 and 2014, and he also plans to increase the threshold to £500,000. There is even talk of swapping the liability of tax duty from being the buyer’s expense to the seller’s expense.

This fresh stamp duty optimism was widely welcomed by the housebuilders who gained on the stock market when his plans were revealed.

So, where do our British housebuilders go from here? Do they offer good value to investors or are they still over-reliant on a Help to Buy Scheme that must, despite several false threats, eventually come to an end? Would a resolution to the Brexit dilemma actually release the backlog of activity in the housing market or has that bird now flown?

If we manage to leave the EU with a deal, housebuilders could gain from a small increase in house prices. On the contrary, if Boris Johnson follows through with his promise of leaving without a deal, house prices will not be immune to a drastic drop, all of which is dependent on whether the market reacts calmly and rationally, or if it goes into a state of shock.

One thing is for sure, and as ever, the fate of the British housebuilder lies in the British peoples’ hands. Deal or no deal, the most vital factor will continue to be peoples’ ability to afford buying a house.


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