Martin Flanagan: Caterpillar looks set to metamorphose into recovery butterfly

Published on Tuesday 2 March 2010 20:22

THE housebuilding sector has pulled out of its credit-crunch-related nosedive. But sector heavyweight Persimmon's annual results show it will be some time before the caterpillar of stabilisation metamorphoses into the butterfly of strong rebound.

That was always likely given the adverse macro backdrop and the new, more cautious, banking industry lending stance, just as Basel II is poised to demand even greater capital cushions at banks in future.

Public finances are in a dire state and the prospect of a hung parliament can only exacerbate that problem and its negative knock-on effects for the whole economy, including the mortgage market. Unemployment is still high and taxation is set to rise. All these are negative indicators for the housebuilders.

Industry data out yesterday showed that mortgage approvals hit a nine-month low in January of 48,198, down from 58,223 in December after bad weather and the end of the stamp duty holiday.

Persimmon itself has come back into the black after writing back some earlier provisions, but the company says any improvement in volumes and selling prices in 2010 will only be incremental.

The group made 8,976 legal completions last year, down from 10,202 in 2008 and average selling prices fell to 160,513 from 172,994.

With rigorous cost-cutting, the group's profit margins recovered in the second half of 2009 to 6 per cent from 1.6 per cent in the first half.

However, Persimmon finance director Mike Killoran reckons it will take "two to four years" to get back to the high-tide margins of above 20 per cent that industry pacesetters like Persimmon were striking in those pre-bust days of 2006-7.

Persimmon is also not the first housebuilder to be concerned by the tight loan-to-value mortgages that home loan providers are now insisting upon.

HSBC revealed earlier this week that its average loan-to-value is just 56 per cent – meaning many buyers had to come up with a deposit of 44 per cent.

That mentality – and HSBC is hardly alone in this new-found mortgage conservatism – will not help either first-time buyers or housebuilders.

Some wonder whether the unhelpful economic conditions for the sector means it will turn its attention to a cyclical round of consolidation.

But it is just as likely that housebuilders will think acquisitions are a diversion too far at the minute. Continuing debt reduction and margin improvement might well be greater priorities.

Persimmon – which has been linked with speculation about a bid for smaller rival Bovis – was certainly giving that organic growth steer yesterday.

Sterling may face an even bumpier ride

WITH sterling, the markets are taking their pound of flesh.

Britain's currency has shed more than ten cents against the US dollar in a little over a week as opinion polls have fuelled the prospects of a hung parliament after the general election.

Financial markets are scared such an indecisive outcome to the election would paralyse attempts to deal with Britain's yawning public deficit.

In the forex markets the pound hit a low of $1.4856 yesterday, after losing four cents to a ten-month low against the dollar on Monday. Sterling jibbed at all attempts to drag it back above the newly psychologically-important $1.50 level yesterday.

Some are now talking openly of sterling testing $1.40 within the next month and possibly even hitting $1.20 by the summer should a hung parliament happen.

Riding in the guard's van of the runaway train of Greek bond debt has been the market's fear that any indecision in Britain over tackling its own frightening debt level – 13 per cent of GDP; wear 3D glasses and be very scared – may see our Triple-A credit ratings attacked.

That somewhat fanciful comparison with Greece has now been replaced with something worrying for Britain on the political front that appears much more rooted in reality.

The odds are strong now that our general election will be fought out against the panicky environment of a virtual collapse in sterling.

This will help Britain's exporters. But few others will be cheering.

Sentiment has also been undermined by Bank of England figures out on Monday showing that foreign investors are hardly giving government finances a vote of confidence.

They sold a net 1.49 billion of gilts – government bonds – in January, the highest figure in nine months.

Hold on tight – sterling's ride could get even bumpier.