Ask Andy: I'm putting away the housebuilders

By Andy Brough
Updated: 10:20 EDT, 27 September 2009

When Napoleon looked across the Channel he had Britain down as a nation of shopkeepers. If he were still alive, he would be thinking we are a nation of house price obsessives.

Long haul: Higher taxes and deposits will slow the sector's recovery

Home ownership is ingrained here and the percentage of the population owning their own homes has risen continually for a century.

The housing market may have seen price falls of anywhere between 25% and 35% since the peak, but green shoots seem to be appearing with the reassuring news that prices are going back up.

The trouble is that the Halifax, Nationwide, Rightmove and Land Registry surveys all give different numbers.

Housebuilders are getting in on the act. A number nearly destroyed themselves by taking on huge sums of debt at the peak and today they are having rescue rights issues to take advantage of that rare bird, 'the lesser sighted upturn'.

Funds are being raised to take advantage of low land prices to rebuild profitability.

They are virtually all raising money to take advantage of a once-in-a-generation opportunity to buy distressed land. Unfortunately, the landowners I have spoken to have no intention of selling at these levels, so I am not sure where all this money will go. Probably back to the banks.

In the good times, builders made margins of between 15% and 25%. Higher land prices, increased build costs and falling selling prices have seen this plunge to nearer break-even.

They have reacted by writing down the value of the land to reflect the lower selling prices and building costs are starting to come down.

Housebuilders have been a major part of the FTSE 250 index and in the past I have been overweight in this market sector. At the time, demand exceeded supply, house So what do I think now? Well, for the first time in the past ten years, I am virtually out of housebuilders.

The recent strong rally in their shares has seen virtually all companies trading at a premium to their net asset values.

In addition, house prices are still expensive when looking at the multiple of house prices to average salaries, especially as this multiple, despite falling in line with house prices, is still at a level that is in line with the last housing peak (it just goes to show what a boom we had).

All this is before the reduction in mortgage availability and the requirement for significantly higher deposits are taken into account. Higher taxes reducing disposable incomes are going to be another drag on recovery.

Investors are really hoping for recovery and are throwing in large amounts to recapitalise the sector. Nearly £850 million was raised by Barratt and Redrow last week. That followed cash-raisings by Bovis, Bellway and Galliford Try over the past month.

The easy money has been made in this sector and I won't be dusting off the housebuilders file until after the General Election.