Lower downpayments to boost UK realty

London: The British government's plan to help reduce down payments for new homes to as low as 5 per cent will give a boost to a homebuilding industry that's learnt how to survive a slowing economy and four years of stingy credit.

Mortgage lending is less than half the level of 2006, at the end of the housing boom, with buyers now required to pay as much as 25 per cent of a home's value up front.

The programme would lower that by providing a guarantee, shared by the government and builders, to protect lenders from some losses in a default.

UK homebuilders have cut costs, changed their products and acquired discounted land over the past two years to improve margins as home sales fell to about half the level of 2006.

Profit growth will likely accelerate from the down payment programme, said Charlie Campbell, an analyst who follows builders at London-based Liberum Capital.

Falling input costs

"If mortgage lending creeps up a bit and new build continues to take share from existing stock, profits will go up quite a lot because the input costs have come down," Campbell said.

The government measure may lift prices by as much as 3 per cent above current estimates and boost homebuilder shares, he said in a note.

Housing construction may rise by 15 per cent or more after the measure goes into effect in the second quarter, Taylor Wimpey chief executive officer Pete Redfern said. The same day, the company said it would meet a profit-margin target early after home sales increased 2 per cent in 2011.

Lenders in the UK are the most active issuers of residential mortgage-backed securities in Europe, which banks create by pooling home loans and selling them to investors as notes.

Public issuance of the securities climbed to €37 billion (Dh176.8 billion) in 2011, according to JPMorgan Chase & Co data, representing 74 per cent of the overall distributed European market. Sales started to shut down in 2007 as the global financial crisis dried up credit, and began to revive in 2009.

Santander UK, a unit of Spain's largest bank, sold $3.4 billion (Dh12.48 billion) of prime mortgage-backed bonds in dollars, euros, pounds and yen, last week, according to data compiled by Bloomberg.

The extra yield investors demand to hold the top-rated securities over benchmarks widened 15 basis points or 0.15 per centage point, to 165 basis points last year, JPMorgan data show. Spreads have narrowed from 425 basis points in January 2009.

The mortgage plan is also aimed at tackling a shortage of new homes that's helped push prices out of the range of many buyers. Around 240,000 new homes are needed each year to keep up with a growing population, Steve Turner, a spokesman for the Home Builders Federation, said by email. That compares with 127,780 built in England in 2010.

Prime Minister David Cameron's coalition of Conservatives and Liberal Democrats is using homebuilding to stimulate the economy and create jobs as it trims public spending to cut the country's record budget deficit.

Gross domestic product rose 0.5 per cent in the third quarter from the second, when it expanded 0.1 per cent, the Office for National Statistics said.

Labour criticism

Ed Balls, treasury spokesman for the opposition Labour Party, criticised the scale of the government initiative, calling it "rather small beer."

Investors weren't convinced either. The Bloomberg EMEA Homebuilders Index fell 4.5 per cent following the November 21 announcement of the lending plan. So far, shares of homebuilders haven't reflected the potential profit boost from the plan, according to Bovis Homes Group CEO David Ritchie.

"You've almost got to deliver before people believe you can do it," Ritchie said in a telephone interview.

"I don't yet think people are giving the house builders the credit when they say they are going to grow their business. They say ‘let's see what you do'."

• 15%: expected increase in housing construction
• €37b:public issuance of securities in 2011
• $3.4b: mortgage-backed bonds sold by Santander last week