Glass half full for housebuilders

I’ve paid £5.50 per four pack for years; it’s now £5.80 – a 5.5% increase. Not that much, but that’s in only a month.

For many commentators, the iconic gauge of consumer pricing is the pint of milk. During childhood amid the roaring inflation of the 1970s, for me it was Cadbury’s Dairy Milk chocolate (a related product, containing “a glass and a half of milk” in a half-pound bar – until the EU outlawed the advert on metrication grounds). This was quickly supplanted by pints of Britain’s best beer (other choices are available).

For builders, the equivalent reference point is the brick. This has been rising far faster than Retail Price Index (+11.1% in the year to April) or the now officially recognised Consumer Price Index (+9.0%). The UK’s second-largest producer, Forterra, announced an additional 12% increase in April following a 16% hike in the usually once-a-year January price review. This was to recoup soaring energy and other costs, with little impact on underlying margins.

These cost increases might have been expected to put housebuilders’ margins under pressure. But, according to most of their latest stock market statements, selling price inflation is outstripping input costs. The UK’s biggest, Barratt Developments, estimates price rises of around 7% are baked into its forward order book, compared with total cost inflation including labour of around 6%. This is far lower than the compound rise of 30% for Forterra’s bricks, suggesting on one hand that other, less energy-hungry materials as well as labour are seeing less marked increases.

I suspect, however, that the big builders have considerably more buying power than their smaller rivals, which may well be feeling the pinch.

Construction group Galliford Try has a novel solution to security of pricing and supply: it will use its strong balance sheet to bulk-buy bricks and other materials on behalf of some of its clients, which immediately take ownership.

On the other side of the equation, what’s behind the remarkably resilient rate of house price inflation, 9.8% over the year to March, albeit down from 11.3% the previous month, according to the ONS? Lack of supply in the secondhand market is widely blamed. This could explain April’s 13.9% year-on-year fall in the number of homes sold – widely and possibly wrongly interpreted as showing a fall in demand.

Sales rates up

Conversely, there was a big rise in sales rates for housebuilders, which are by nature ‘forced sellers’, presenting buyers with the alternative prospect of chain-free purchases. Almost all of the top five quoted groups reported increases, with the number of private sales per site per week – the industry benchmark approaching 1.0x – well up on the typical long-term norm of around 0.7x.

This has been against a backdrop of rising interest rates and the cost-of-living crisis. But, as I suggested last month (p21, 13.05.22), many of the potential buyers that are on or capable of getting on the housing ladder have rarely had it so good. Soaring energy costs may in fact tip many of them towards new thermally efficient homes rather than characterful but leaky Victorian ones.

This week, Property Week reported that Octopus Energy and offsite manufacturer ilke Homes were making a virtue of high bills, forming a partnership to roll out the UK’s first homes to guarantee residents zero energy bills (‘Octopus and ilke Homes to deliver zero energy bill homes’).

However, it would be rash to assume inflation is going to go away soon and that the cumulative effect of this, on top of historically high prices, would not take some of the momentum out of the demand side. But I’m not convinced that prices will fall, with unemployment low, wages going up and competition still tight among mortgage lenders.

As to LPI, I suspect the next move will see four cans of Pride with a ‘six’ in front.

Alastair Stewart is an equities analyst and consultant