FT.com
Wednesday January 9, 8:35 am
ET Shares in British housebuilders seem to confirm the idea that the UK is the 51st state. UBS (NYSE:UBS) points out that the sector, which halved last year and has started 2008 in similar form, has recently been tracking its US counterpart, albeit with a 12 month lag.
That obscures serious differences in the two markets. Home building in the US is highly fragmented, and obtaining land and planning permission is usually a cinch. So the industry has been left with massive oversupply at the same time that mortgage defaults have leapt and credit dried up. Over in the UK, chastened by the memory of the early 90's recession, inventory levels are low because a more consolidated industry now prefers to build to order. The proportion of UK mortgages in arrears, while up slightly to 0.5 per cent, is a long way from the 3.5 per cent peak of 1992, when house prices fell by 6 per cent.
So is the pessimism overdone? The housebuilders now trade on lowly mid-single digit trailing P/E valuations, and just 0.7 times book value. If the last downturn were to be repeated, this would be rational. By 1993 sector earnings had briefly bottomed at a fifth of their 1989 peak, and book values had been written down by almost 40 per cent.
But such a meltdown would require house prices to slump rather that just ease. The value of land holdings cannot be written down until development of the assets becomes unprofitable. It would take a fall in selling prices of at least 15 per cent to wipe out operating margins. Provided the housebuilders accept lower volumes and do not resort to discounting, this seems unlikely without a major rise in unemployment or repossession rates. With Armageddon now anticipated by share prices, it could well be time to buy.
