Why Do House Builders Keep Posting Record Profits If Property Market Is Stagnant?

Barratt Developments has posted pre-tax profits for the first half of its fiscal year that are an almost 20% improvement on those over the same six months of the previous year. The company’s gross margin was also up 2 percentage points. The average selling price of its completed new homes was £282,000, slightly higher than the previous year and 7,662 homes. Over the whole 2017/18 fiscal year the company delivered 17,576 new residential properties. That’s its second highest total ever and the company stated that it plans to increase that output over the next couple of years.

Redrow, another listed housebuilder, posted record profits this week. Its profit before tax was up 5% and revenues up 9%. The number of new homes it finished construction on was 12% up on the previous period and its average selling price increased by 4% and 15% in the case of affordable housing units. Bovis announced in mid-January it is on track for record profits and Bellway homes has also told markets that it expects to sell more houses and apartments in 2019 than it did last year.

Over the last few months of 2018 the share prices across the sector fell by around 25%. They’ve rebounded by around 20% so far but given the rude health of the results that housebuilders have been releasing to the market there is a good chance the rest of those late 2018 losses will be recouped. At 561.80 GBX, the Barratt share price is now only slightly off its 577 GBX September high. The Redrow share price is back to 593 GBX from 599.50 GBX in September.

But investors might be forgiven for being a little confused. Most of the property market news over the past several months has been negative. Yes, prices have held or increased in some areas last year, particularly large regional towns or cities from Birmingham north. But as an average over the whole country we are told they were stagnant and that transaction volumes have dropped off meaningfully as Brexit uncertainty put people off moving home. So how are the UK’s publically listed housebuilders managing to rack up record profits while increasing the number of homes they complete?

A big part of the reason appears to be a distinction between the market for newly built homes and that for resale. The first time buyer market, which favours new-built properties, has been heavily supported by the government’s Help to Buy scheme. Under the scheme, first time buyers only need to find a 5% deposit. 20% is paid to the builder by the government as a 5-year interest free loan to the buyer and low interest rate mortgages are readily available for the remaining 75%. This has kept prices for new built homes growing or at least stable pretty much across the country and demand high.

Help to Buy accounted for between 30% and 40% of the sales of housebuilders last year and the scheme is due to run until 2023. It does raise the question of what happens to the market when Help to Buy comes to an end and interest rates do finally go up again. It can be expected that Help to Buy might be extended or replaced by a similar scheme that helps first time buyers. But the reliance that housebuilders currently have on stimulus measures does have to be considered a risk for investors.

Analysts do warn that Brexit fallout could still derail housebuilders over coming months but that with strong cash flow and forward sales pipelines most are currently well positioned to ride out any turbulence and temporary market slowdown.