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Why The Homebuilders Are Sliding Again This Week

The home builders have got off to yet another bad start this week. Persimmon (LSE: PSN)Barratt Developments (LSE: BDEV)Taylor Wimpey  (LSE: TW)Berkeley Group (LSE: BKG) and Bellway  (LSE: BWY) have all underperformed the FTSE 100 by more than 1% since Friday morning.

Barrett’s performance has been the worst, with the company’s shares sliding around 4% on Monday alone. But what is the reason for this poor performance?

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In the cross hairsOLYMPUS DIGITAL CAMERA

It would appear that the roots of this recent sell off can, once again, be traced bank to the Bank of England. The bank continues to view the UK property market with caution, believing that rising property prices could destabilise the UK’s economic recovery.

Indeed, over the weekend, David Miles, one of the Bank of England’s most non-aggressive policy makers, warned that interest rates were likely to rise during the next few months.

Specifically, Mr Miles said it was increasingly likely he would vote to raise interest rates before leaving the BoE’s monetary policy committee next May. The bank believes that higher interest rates are likely to cap demand for housing, although higher rates could put existing borrowers under significant pressure.

Perfect storm

However, these comments from the Bank of England have come at a bad time. Mr Miles’ comments were published after a shocking revelation from UK mortgage lenders.

In particular, Mortgage lenders within the UK have revealed that they expect loan approvals for households to “fall significantly” over the next few months.

This news is based on data from the Bank of England’s Credit Conditions Survey, conducted during the second quarter of this year. The survey revealed that lenders believe the Mortgage Market Review, introduced by the FCA, imposing stricter affordability tests on lenders, will hit mortgage approval rates.

Strict criteria

The Mortgage Market Review criteria were introduced to ensure that lenders could, with some degree of certainty, establish whether or not borrowers would be able to afford repayments in a number of different scenarios, such as higher interest rates.

What’s more, in addition to the mortgage affordability test, the Bank of England’s Fiscal Policy Committee is widely expected to introduce loan-to-income ratio restrictions later this year.

Of course, with all these measures designed to reign in the property market, it’s no surprise that the market has started to turn its back on the home builders.

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Rupert does not own any share mentioned within this article.

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