Builders' profits face big squeeze

NEWS of the first dip in house prices for three years has raised fears of a massive squeeze on the profits of the housebuilding sector.

The latest Nationwide housing index reading showed prices falling 0.4% in October. This, the first decline since the aftermath of 9/11, comes at a time of rising costs for the industry. Soaring prices for land, labour and finance are putting pressure on companies' margins.

Research by Mark Howson of Dutch investment bank ABN Amro shows that a modest 5% fall in both like-for-like house prices and volumes would cut builders' earnings by a third in 2005.

Arguably even more worrying for the industry, is the effect of the slowdown on the 'trapped profit' inherent in the rising value of companies' banks of unbuilt land. Howson suggests that current year profits would be 24% lower were builders selling houses on land bought at today's prices.

If house prices were then to go backwards, the impact on profits could be catastrophic. The last time this happened, from 1989 to 1993, a 17% dip in house prices led to a 44% crash in residential land values. Profits in the industry were decimated as a result.

Already, gloomy trading statements in the past five weeks from Countryside Properties, Taylor Woodrow, George Wimpey and MJ Gleeson have knocked around a quarter, or £3bn, from the market value of the top 10 housebuilders.

Meanwhile, data from website SmartNewHomes.com show that the price of new properties fell 2.6% in September, the third drop in five months.

David Taylor of broker Teather & Greenwood says the level of forward sales means profits for this year are largely in the bag.

The soaring land factor

THE soaring price of land for housebuilding in England and Wales has massively boosted housebuilders' profits over the past 10 years. The price of a hectare has more than quadrupled to £2.29m since 1994, while in London the equivalent rise has seen the cost leap to a massive £6.68m.

Estimates of how much of the value of a house land represents vary depending on location. In the north of England it can be as little as 20%, in the south as much as 40%. Labour costs are also significant. Although these are rising fast, the ability to shed workers fast in a downturn means that these costs are much more flexible.

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