By Eric Jones
LONDON -- The U.K. housing market shows signs of improvement and developers are looking to acquire land again, but economists say a sustained housing recovery remains far off.
Home prices fell for six quarters beginning in February 2007 to about £158,000 ($256,500), down from nearly £200,000 at the peak, according to Halifax Bank. But prices have risen 1.9% since April, said Nationwide Building Society, and lending volumes have been stabilizing since February, according to the Bank of England.
While the improvements are notable, economists say they are temporary and prices could start to decline again now that the spring buying season has ended.
"Although the sector has witnessed a better performance in terms of volumes secured in recent months, this is likely to turn down as we progress through the summer," said Rachael Waring , building and property analyst at Panmure Gordon.
In the last U.K. housing slump from 1989 to 1996, there were four times in which the housing market had rallies similar to the rally just experienced. None of these rallies were sustainable, and after a short period, prices fell further each time. Each also occurred during the traditionally strong spring season.
Inadequate mortgage financing remains the problem. Though home prices and lending volumes have risen, the issue of deficient financing hasn't been solved, said Seema Shah , an analyst at Capital Economics. Lending policies have actually tightened, with mortgage rates rising this month. First-time buyers find it particularly hard to secure mortgages, Ms. Shah added.
The U.K. government is trying to encourage freer financing flows with its Home-Buy-Direct Scheme, which allows first-time buyers to secure a 70% home loan, with the government and house builders sharing the rest of the equity. But banks are still reluctant to lend to first-time buyers, making the program largely ineffective, said RICS chief economist Simon Rubinsohn .
Barratt Developments /zigman2/quotes/209812640/delayed UK:BDEV -1.98% PLC is the only major U.K. developer whose share price has risen over the past three months, but despite the gains, Chief Executive Mark Clare said the market is "not going to see a sustained improvement in trading conditions until the availability of mortgage finance improves."
The market also could be restrained by concerns about rising unemployment, which is crimping demand. Economists predict unemployment will rise to more than three million in 2010 from 2.2 million now.
For home builders, this climate does present an opportunity to buy land at deep discounts if they have the cash or equity on hand to do so.
Bovis PLC, which has a policy of investing in land for long-term value, and Bellway /zigman2/quotes/208360300/delayed UK:BWY -0.33% PLC, which focuses on regeneration projects, hold limited amounts of debt on their balance sheets and have good cash flow, which gives them the ability to buy land. Berkeley Group Holdings /zigman2/quotes/202576163/delayed UK:BKG -0.40% PLC is in a very flexible position financially as the only debt-free developer, holding £285 million of net cash.
Bovis said it is looking to get back into the residential land market in the second half. John Watson , CEO of Bellway, in May said the company will spend more than £100 million on new land. Berkeley has a policy of matching production to demand but, despite the weak market, plans to spend £150 million on land.
Taylor Wimpey PLC, the largest U.K. developer by revenue, has expressed interest in stepping back into the land market. But the company is burdened by £1.01 billion of debt and has £4.75 billion of land and stock, much of which was bought at land price peaks in 2007, said KBC Peelhunt analyst Robin Hardy , and is therefore vulnerable to large write-downs.
However, analysts say that among the big players, the company may perform the best when recovery does come. Tom Gidley Kitchin , an analyst at Charles Stanley, said Taylor Wimpey is at risk because of its exposure to the U.S. and Canadian markets and its highly leveraged balance sheet, but if the market turns, those factors that penalize it now will enhance performance.
Persimmon /zigman2/quotes/206444744/delayed UK:PSN -0.70% PLC, the largest U.K. house builder by market capitalization, said that with 64,500 plots, its land bank is large enough for seven years' work and land purchases aren't needed. It reported an impairment of £652.3 million on its inventory for 2008 due to the deteriorating housing market but doesn't expect to take any more write-downs, giving it the ability to build quickly when the market finally turns.
The company reported debt of about £495 million at the end of June. Nevertheless, Panmure Gordon's Ms. Waring said it "is well placed to weather the storm."
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