After putting in an impressive performance last year, the homebuilders Persimmon (LSE:PSN), Barratt Developments (LSE:BDEV), Taylor Wimpey (LSE:TW), Berkeley Group (LSE:BKG) and Bellway (LSE:BWY) have all seriously underperformed the market this year. And things are unlikely to get better any time soon.
A great year
Last year was a great year to be in the homebuilding business for several reasons. Firstly, rising house prices, boosted by the help to buy scheme, sent profits surging. Additionally, the availability of cheap credit sent demand skyrocketing.
However, the Bank of England(BoE) has become concerned about the effect that rising house prices are having on the economy. As a result, the bank has hinted that it may begin to hike interest rates later this year and has started to introduce other measures aimed at cooling the property market.
With the BoE set on reigning in the property market, investors have become concerned that the market could suddenly take a turn for the worse. There are also some signs that demand for housing is starting to fall as high prices put off buyers.
A silver lining
However, as the BoE and the government work to introduce measures aimed at taking some heat out of the market, the government is trying to encourage house builders to build more affordable housing.
The most recent of these measures is the government’s commitment to help builders develop brownfield land. Brownfield land is best described as derelict and disused industrial or commercial land, which often needs to be cleaned up before construction can begin.
The government has asked local councils to relax planning laws for the development of brownfield land. Hopefully, this will spur a construction wave of affordable housing.
There is enough brownfield land in England for 2.5m new homes. So, if councils begin to work with developers there is huge potential for the industry.
Starting to cool
Still, away from the affordable housing market, there are signs that the UK housing market is starting to cool.
According to Rightmove, house prices increased by just 0.1% last month, ending many months of high single-digit gains. What’s more, the UK’s leading property website noted a 0.5% fall in London property prices.
Rightmove’s data shows that the London market is now faced with a wave of sellers, but few buyers. Specifically, the company reported that last month the number of homes for sale within the capital jumped 20%, while the number of buyers remained constant.
This lack of demand implies that high prices are scaring some buyers out of the market. It also shows that the affordability caps, introduced by banks like Lloyds and RBS are starting to have an effect.
Rupert does not own any share mentioned within this article.