There’s an old stock market adage, dating to less assiduously policed times: buy on the rumour, sell on the news. At least when it comes to good rumours.
However, the opposite played out after housebuilders wheeled out a litany of sobering updates this month: their shares went up.
Barratt Developments was followed in close formation by most of its quoted rivals, updating investors on their latest trading periods, most critically in the aftermath of the 23 September ‘Growth Plan’. Developers are used to building brick walls – and that’s what sales hit following former chancellor Kwasi Kwarteng’s car crash of a mini-Budget.
A word search identified multiple uses of the adjective ‘challenging’, amid falling sales, widespread cancellations, enhanced incentives and a sudden aversion to land-buying. Yet, a week later the sector’s shares had risen by an average of 8%, continuing a run that saw them rising almost 40% from their 12-month lows.
The key barometer for housebuilders is their ‘sales rate’: reservations per site per week. For Barratt, Britain’s largest housebuilder by volume, reservations in July and August had been running at a relatively sluggish 0.60, versus the industry’s long-term norm of roughly 0.70, as inflation weighed on consumers. But it collapsed to 0.30 in the last 12 weeks of 2022 as the mini-Budget led to soaring mortgage rates and a swathe of offers being pulled by lenders.
UK number two Persimmon’s missive next day was even glummer in tone with a glacial rate of 0.19 in the last seven weeks of the year, admittedly more weighted to the traditionally quieter run-up to Christmas. This could be explained by Persimmon’s focus on much lower price points (£272,000 versus Barratt’s £372,000), with first-time buyers more dependent on high loans-to-value. The third largest, Taylor Wimpey, provided little respite.
Part of the recent strength of the sector can be attributed to less negative macro-economic trends and a revived appetite among global investors to invest in the UK, weighing down on gilt yields and fuelling a recovery in the domestically focused FTSE 250.
At their low point in 2022, housebuilders’ shares had halved during the year, based on the assumption that the housing market was heading to hell in a handcart. But, despite the gloomy tenor of their statements, housebuilders demonstrated that rumours of their impending demise were greatly exaggerated; the ‘news’ was they were progressively seeing a partial return of would-be buyers since Christmas – admittedly tempted by a selection box of incentives.
Persimmon’s was probably the most attention-grabbing: the group announced on Boxing Day an offer to cover up to ten of buyers’ monthly mortgage payments if they reserve a home by the end of February. The incentive, worth up to 5% of selling prices, had sparked a three-fold increase in enquiries versus the previous weeks and the improvement had “continued into the new year”.
Persimmon’s was probably the most attention-grabbing: the group announced on Boxing Day an offer to cover up to 10 of buyers’ monthly mortgage payments if they reserved a home by the end of February. The incentive, worth up to 5% of selling prices, had sparked a threefold increase in enquiries versus the previous weeks and the improvement had “continued into the new year”.
Other builders less dependent on first-time buyers were offering sweetened part-exchange deals for owners to trade up among a host of incentives, generally in the same 5% ballpark. The consensus was there had been few reductions in headline selling prices.
Looking to 2023, most companies provided a wide range of outlined scenarios for sales volumes, invariably downwards. All were explicit that they would be buying little land until the picture became clearer, with muttered suggestions they would try to wriggle out of existing commitments. A story relayed by a chief executive of one housebuilder was that an executive board director of another had walked away from a deal with a large land vendor after shaking hands on the deal. “We’ll never work with that company again” was the response.
A ray of light broke through at the end of a week and a half of sackcloth and ashes. Vistry chief executive Greg Fitzgerald gushed: “Every week’s been better than the week before.” The housebuilding division’s margins were holding, land prices were falling and it was “seeing very good opportunities”.
Peers might be forgiven for concluding, slightly paraphrasing When Harry Met Sally: “I’ll have what he’s having.” But sceptics should beware: Fitzgerald has a better record than most in calling turns in the market – in both directions.
Alastair Stewart is an equities analyst and consultant