Signs of a seasonal housing recovery are welcome but may be optimistic

Published on Saturday 27 February 2010 14:39

THERE can't be many who are looking forward to the first official day of spring tomorrow as much as Mark Clare. After more than two years of gloom, 1 March is expected to bring some welcome rays of sunshine to the battered housing market and few are hoping to benefit more than the chief executive of Barratt Developments.

Spring is traditionally the time when hopeful young couples, families and first-time buyers take to the streets in pursuit of their dream home. But ever since the US sub-prime crisis plunged Britain into a state of uncertainty in the summer of 2007, these once ubiquitous house-hunters who used to fight over even the most rundown properties have been virtually extinct. Clare is hoping this is about to change.

Barratt, Britain's biggest housebuilder by volume, revealed in its half-year results last week that customer demand and prices have staged a recovery, with orders up 27 per cent in the six months to 31 December. Although the firm sustained a pre-tax loss of 178.4 million during the period, analysts say the figures give cause for optimism against an interim loss of 594.5m during what the City now commonly refers to as the "dark days" of late 2008.

Smaller rival Redrow painted a similarly hopeful picture on Thursday when it reported that half-year losses had eased to 8.7m in the second half of 2009 from 46.2m during the same period in 2008.

Fellow housebuilders Taylor Wimpey and Persimmon are expected to add to the growing tale of optimism when they report full-year figures this week.

Persimmon is understood to have reduced its debt pile to 270m from 599m between 2008 and 2009, while Taylor Wimpey's debt mountain is now thought to stand at around 786m, down from 1.5 billion at the end of 2008.

With few economic statistics able to rouse the same emotion as housing market data, this week's announcements from Taylor Wimpey and Persimmon will further stoke expectations that the long-awaited recovery is finally under way. But with warnings of a double-dip recession, particularly in Scotland, still causing sleepless nights in some quarters, is the improvement in the housing market likely to prove a false dawn?

According to Roger Humber, strategic adviser to the House Builders Association, few firms gambling on a housing market recovery will be popping the champagne corks yet. Although the figures from the housebuilders are encouraging, the long-term outlook remains troubling, he warns. "The figures look good because they are from such a low base. The reality is there is no sign of things looking up whatsoever. That's because I can't see any prospect of mortgage lending improving significantly."

Despite a 9 per cent jump in UK mortgage approvals in the closing months of 2009 – a 4 per cent rise in Scotland – Humber says mortgage availability and pricing have improved little since the height of the recession when the market came to a virtual standstill. The crisis remains particularly apparent at the lower end of the market, where in the majority of cases first-time buyers are still required to find deposits of as much as 30 per cent. Last week Santander raised cheers when it announced the return of 90 per cent mortgages for housebuyers. But the limit for first-time buyers of new flats will only improve to 80 per cent of the property's value, compared with Santander's previous limit of 70 per cent.

Although housebuilders hope Santander's move will provoke a reaction from the other major lenders, Humber warns that the logjam in the lending market could hamper a recovery for at least two years – and possibly even longer.

He describes the recent results from the likes of Barratt and Redrow as a "bang of the drum to get the share price up". He says: "It has nothing to do with reality."

Rachael Waring, analyst at Panmure Gordon, is less pessimistic but warns that the housebuilding sector is certainly not on a "big crest of recovery" due to the ongoing constraints of the mortgage market. She says that Santander aside, most mortgage lenders continue to require a 20 per cent deposit on the purchase of a new house.

However, unlike 2008, when many of the housebuilders saw their share prices go into freefall, Waring argues that this time round most firms are better prepared to weather the storm. "They have obviously taken a lot of the cost out of the business," she says.

She also points out that many of the housebuilders, including Barratt and Redrow, are repositioning themselves towards the family homes market and abandoning pre-recession strategies of knocking up large apartment blocks. "It's a change in strategy that will protect them to some extent," Waring says. "It's what most people want in terms of the housebuilding companies. Families don't want to live in a flat."

Imran Akram, analyst at Collins Stewart, agrees that a move away from flats to family homes is likely to aid companies such as Redrow. Against this shift in strategy, he last week upgraded his recommendation on Redrow shares from "sell" to "hold". "This is justified by the huge Redrow writedowns to date (over half the landbank], the return of founder Steve Morgan, and the rollout of the new Redrow range aimed at bringing the group back towards family housing," he said in a note.

At the coal face, Willie Hunter of Hunters solicitors in Edinburgh agrees that flats at the lower end of the market will continue to suffer this year, while he can foresee a sustained interest in family homes. "It's the 100,000-200,000 bracket that is potentially difficult because people can't get the mortgages. It tends to be higher up the market that there is more activity," he says.

"People are realising that it's not just a question of buying a property now and making 10,000-20,000 on it in a few years' time. The focus is going away from the investment market and people are saying: 'Is this somewhere we could happily stay as a family for the next five to ten years?'"

Hunter reports that he too has seen a revival in activity and demand since the beginning of the year. Last month he put 46 properties on the market, compared with just 15 in February last year. But he warns that the housing market is far from clearing the woods – particularly given the political uncertainty surrounding the general election.

"It's going to be a game of two halves in 2010," Hunter predicts. "There's going to be quite a bit of activity pre-election because people are uncertain about what will happen afterwards."

While the outlook for housebuilders may be cautiously optimistic, Lindy Patterson, one of Scotland's leading construction lawyers at Dundas & Wilson, warns that other parts of the construction sector are unlikely to be so lucky.

Small and medium-sized contractors which managed to survive the recession due to a backlog of public sector work could find themselves with naked order books this year, Patterson warns. Administrators are bracing themselves for a string of failures at the lower end of the construction market.

"It's going to be a critical year," Patterson concludes.