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News - 11 June 2008

House builders suffering

A combination of falling house prices and nervous mortgage lenders is a bad combination for the UK’s house builders many of which are seeing their share prices tumble and their construction projects stall.

Some of the UK’s largest house building firms are reporting a 50% reduction in deposits on new builds over the past six months as borrowers struggle to get funds and others decide to wait until the bottom of the market is clear.

The chairman of the Home Builders Federation – Stewart Basely – said, “the market just fell off a cliff” and this is reflected in the shares of companies like Taylor Wimpey, Persimmon, Barratts and Bellway.

Barratts suffered particularly badly yesterday amid a frenzied day of trading after analysts at Dresdner Bank said the collapse in house sales, married to the firm's £1.7bn of debt, meant it was unable to put a reasonable value on the business.

There are now reports of housing projects across the country being mothballed with half-built homes being made weatherproof and left as builders face the worst slump in sales for decades. A report by the Royal institute of Chartered Surveyors (RICS) released earlier this week said house sales were at their lowest level since it began collecting data in 1978.


Banks are nervous about lending to anyone but they are especially nervous about new build flats many of which have been built with investors in mind rather than home owners. Both potential home owners and investors have now taken fright.

Many developers also fell into the trap of marking up the headline cost of an apartment and then offering a discount to make it look as though the purchaser had provided a deposit thus facilitating 100% mortgages. As a result banks now demand deposits of as much as 40% on new build flats placing them even further out of the reach of genuine first-time home buyers.

This does not bode well for the government's aspiration to build 240,000 new homes a year, nor for the 300,000 people working in the industry, nor for the wider economy since house prices have such an important psychological effect on consumers.

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