Life has gone from Nice to Vile for housebuilders

IN WHAT may prove to be a year of corporate funerals, that of the housebuilding industry will cause major grief. It is one of the UK's biggest employers. And there are tens of thousands more whose livelihoods are linked indirectly to it.

What seemed just three months ago to be a mild downturn is turning out to be severe, and with little prospect of early recovery. Even for an industry prone to cyclical ups and downs, this one will prove terminal for many smaller companies.

National House-Building Council figures, shown here, tell of a 13 per cent fall in housing starts. More recent government figures for England showed private housing starts down 25 per cent on a year earlier.

Since then the news has grown even worse. Persimmon, Britain's biggest housebuilder, said last month it would stop building on 30 new sites, blaming falling consumer confidence and "an unprecedented tightening in the mortgage market".

The group is a stock market horror story. Its shares, changing hands at more than 14 a year ago, have plunged 61 per cent in the past 12 months and 7.75 per cent in the past week alone. They closed yesterday at 555.5p.

The picture from Barratt is no better. Its shares, 1,122p a year ago, are down 78 per cent over 12 months and 8.9 per cent in the past week to just 248.25p. The overall sector has fallen equally steeply, obscured by the mining-fuelled market recovery of the past two months that has so distorted the FTSE 100.

Recent news flow has been appalling. Bovis revealed it had sold only 120 houses since unveiling full-year results in early March, implying a fall of some two thirds over an eight-week stretch that covered the fabled "spring selling season".

So, in a few short months, we have gone from a 20 per cent decline in new starts as the accepted figure, then 25 per cent with Taylor Wimpey figures, then 35 per cent with Persimmon and now a rumoured 60-65 per cent in the first weeks of May on deeply worrying figures from Bovis.

Sector morale could hardly have been lifted by a letter in the Financial Times last week from Andrew Warren, director of the magnificently entitled Association for the Conservation of Energy. Warren accused the volume housebuilders of "using a (marginal]downturn in its market to call yet again for a relaxation in building regulations".

But this is no "marginal" downturn. It is shaping up to be one of the worst slumps in 30 years. For something else has changed. Two months ago the expectation was that interest rates would be cut to 4 per cent by the end of the year, helping mortgage flow. But there is now little prospect of anything more than a quarter percentage point cut as the Bank of England wrestles the inflation dragon.

Government housing targets, amusing on the day they were pronounced, are now a total laughing stock. Warren's association can only be delighted if the entire industry goes into freefall, conserving all that energy needlessly frittered on new homes.

Indeed, what is the point of builders starting new sites when government ministers are now working on estimates of house price falls of 10 per cent "at best" and buyers cannot obtain mortgages?

Persimmon's chief executive, Mike Farley, has warned that the industry overall may build only 110,000 homes this year. That's 33 per cent down on 2007, and 55 per cent short of the government's target of 247,000.

But even these figures do little justice to the severity of the implied jobs shake-out and the wider knock-on effects.

Britain's housebuilders are early victims in the switch from the era of Nice (Non-Inflationary Continuous Expansion) to Vile (Volatile Inflation, Less Expansionary) – with ferocious economic and political consequences.

These may compel the government to cut stamp duty for first-time buyers and take other action to head off this hardest of landings. Without such action, a grim funeral of the house-builders looks just a matter of time.

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