UK Housing Market and builders review.

Mix-adjusted House Price Index for London and the UK - Click to enlarge

House Prices
There was a good video on this at the FT's site which you should be able to view if you sign up for a free account if you are not a subscriber. This made some good points and had some good graphics on house price to earnings ratios being nearly as high as in previous frothy periods, However as a counter to that it also pointed out that affordability is actually relatively low (good) based on the current low mortgage rates. 

The counter to that is that people now think rates are going up sooner rather than later based on what the governor of the Bank of England, Carney, has said, but I note up to now he has been quite keen on moving the goal posts as soon as one of his triggers like the unemployment rate has been hit. Thus he may be talking tough in the hope of it having some effect and putting off the day for as long as possible when they actually have to act. In any event they have made it clear that any moves will be gradual and that they don't see rates going back up to their previous levels with 3% often mentioned as a more likely level for base rates to reach.

There was also some interesting data from the ONS last week which you can download if you are interested and they have also pointed out in a recent report that the regional house price gap has reached its highest ever level underlining that the current "bubble" has been very much a London phenomenon. However in another report (which the graph above comes from) they point out that this has not always been the case.

House Builders
As a result of all the recent sell off in mid caps house builders have come back quite sharply as a result and some people are on the pitch because they think it's all over. This is also an interesting debate as the valuations are low - which they normally are for house builders and the growth prospects seem set fair for the time being. However, investors are concerned about the effects of an eventual rise in interest rates and the possibility of a fall in house prices as a result. Now the stock market is usually a discounting mechanism that works about 9 to 12 months ahead. So it is possible that the current weakness is discounting a slow down and price falls to come on the back of rate rise and post the election next May, when i guess it is possible a new government could scale back or even scrap the controversial Help to Buy schemes.
There was also a good piece on the sector by Dominic Frisby on the Money Week website recently.

Summary and Conclusion
On balance though I am inclined to give the builders the benefit of the doubt for now as I believe they will probably be able to trade their way though the next year or two and manage their margins by varying the mix and the rate at which they release older land. Indeed it is the value of the land bank which is probably the most important swing factor for the builders. This is because the value of development land swings around to a much greater degree than house prices. Thus in a boom they are able to report strong profits as windfall gains accrue to them from building out sites acquired at knock down prices - much like they are now. Conversely, come the downturn they often end up having to make big write offs to their land banks bought at peak prices. Obviously if you think we are currently at the peak of the cycle then you wouldn't want to pile into the house builders.

It seems to me that most of the talk of a bubble relates to the London market and if it is like previous cycles then this strength is likely to spread out to the rest of the country eventually if the current economic recovery continues and peoples confidence in their finances improves. I will however be watching developments closely for signs that things are starting to go into reverse. At the moment I can't see any sign of this, but I can see why the market might worry about a slow down post the election next year - so as ever you pay your money and take your choice and time will tell. 

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