There has been a knee jerk reaction following Abbey’s announcement regarding the 5 times salary mortgage. Some commentators suggested that the housing market is getting out of hand and one has suggested that whereas in the 1980s the average house price was 3.4 times annual salary, the figure today has risen to 6.1.
So, where next for the housing sector? The “feelgood” factor surrounding the economy not so long ago was due in no small part to house prices, but it has since become apparent that these are levelling off, compared to the aggressive growth rates they underwent in the first few years of this century.
Traditionally, property sector stocks do not resume their upward trend until interest rates have peaked, the accepted wisdom being that for every uptick in interest rates, a typical mortgage becomes more expensive and therefore reduces the number of people who can afford to buy. The problem here is that City economists seem to be in total agreement that there is at least one more quarter of a percent rise due, with the favourite time for the increase being tipped for later this month.
It is also a slight concern that the last (unexpected) rate rise in August has not quite had time to filter through to the wider economy yet (the generally agreed time is around six months) let alone another one on top. This of course is in addition to higher utility bills for the average household due to rising energy costs.
On the plus side, demand at present continues to outstrip supply. There are strong earnings estimates from the big players in the sector and of course the Government is looking to increase the supply of new housing. All good news.
However, are we now approaching a stage where it is simply becoming too expensive to buy? There are fewer first time buyers than has been the case for a significant time. Also, the buy-to-let market has shown signs of being more expensive to enter, which has discouraged new entrants, and indeed of late there has been a drop in lending to buy-to-let investors. It is, of course, all very well for the Government to encourage new housing, but if the demand (or wherewithal) is not there, the land will stay empty.
Results and, equally importantly, comments from some of the bigger names in this sector have been bullish in the extreme, with the likes of Persimmon and Barratt reporting no slow down in business at all.
A review of property shares over the last 12 months finds the sector reflecting a mood of optimism going forward.
Commercial prices continue to rise and the Real Estate sector (+44.5%) has outperformed the broader FT-All share index (+15.5%) by an impressive 29% over the last year.
The mood within the housebuilding sub-sector (situated within the broader Household Goods sector) also appears to reflect a mood of optimism. The sub-sector (+53.8%) has outperformed the FT-All share index (+15.5%) by 38.3%.
Digging below the surface, there are underlying factors outside of investment optimism which look to have been playing their part. In the Real Estate sector, prospects for the introduction of Real Estate Investment Trusts (REITS), scheduled to commence in January 2007, appear to have been a driving factor.
Then of course, there is potential Merger and Acquisition activity. For example, within the housebuilding sub-sector, actual (McCarthy and Stone) and rumoured (Wilson Bowden) takeover hopes appear to have been a driving force behind the sector’s strong performance.
As ever, there will be winners and losers and the importance of picking the right stock in any given sector will remain key.
If you’d like to read more free research, comment and analysis from me and the rest of my colleagues at Hargreaves Lansdown please visit our website at www.hargreaveslansdown.co.uk
Richard J Hunter
Head of UK Equities
Hargreaves Lansdown
www.hargreaveslansdown.co.uk