David Cameron’s Plan for Homebuilding Industry Fails to Impress Investors

Prime Minister David Cameron’s plan to bolster U.K. homebuilding through investment and mortgage guarantees was hailed as a “lifeline” by an industry group after it was introduced yesterday. Shares in all the largest house builders fell.

Mortgage guarantees alone “will not be enough to get the market moving,” even though it goes further than previous initiatives, said Jim Ward, a research director at adviser Savills Plc. (SVS)

The coalition government introduced a mortgage guarantee for as many as 100,000 new homes, a 400 million-pound ($630 million) fund to reactivate stalled developments and the release of land for residential use. That may fail to overcome the effect of the government’s spending cuts, a slowing U.K. economy and reluctance by banks to grant mortgages.

Though the plan makes a good start, it’s “rather small beer in its scale,” said Ed Balls, treasury spokesman for the opposition Labour Party. He reiterated his party’s call for more significant spending on infrastructure to bolster growth.

The Bloomberg EMEA Homebuilders Index (BEUHBLD) fell 4.5 percent yesterday, more than the 2.6 percent decline in the FTSE 350 index. Stocks worldwide dropped yesterday after U.S. lawmakers failure to agree on deficit cuts. Persimmon Plc (PSN), Barratt Developments Plc (BDEV), Taylor Wimpey Plc (TW/), Bellway Plc, Bovis Homes Group Plc (BVS) and Berkeley Group Holdings Plc (BKG) all fell by at least 1.8 percent yesterday. The index was up 0.7 percent as of 9:13 a.m. in London today.

Investment, Planning

The Housing Strategy announced yesterday seeks to boost homebuilding as the economy falters and Cameron’s government cuts a record peacetime deficit. The plan is designed to tackle issues affecting the market ranging from planning and the provision of social housing to investment and reducing the number of empty homes.

Development and mortgage finance has become harder to obtain as banks clean up their balance sheets, causing construction of new homes in Britain to slow. This has worsened a housing shortage, lifting rents and property prices while shutting out first-time buyers. The government estimates that 1 million pounds spent in home construction would create a dozen jobs lasting a year. Homebuilders accounted for a fifth of the contraction in the economy in the last recession, it said, citing the Office of National Statistics.

Lower Down Payments

From the second quarter of 2012, more borrowers seeking to buy a new home will be able to get a mortgage with a down payment of as little as 5 percent of the purchase price under the program. A government-led guarantee will protect lenders from some of the losses incurred in a default, encouraging them to provide larger mortgages.

“This could be genuinely helpful as it should increase the supply of mortgages for new home buyers,” said Charlie Campbell, an analyst who follows homebuilders at London-based Liberum Capital.

There are 295 mortgage products currently available in the U.K. that require down payments of 5 percent to 10 percent of the property’s purchase price, according to personal finance website moneyfacts.co.uk. That compares with 1,815 at the height of the property bubble in 2007.

Most lenders currently require 20 percent to 25 percent down payments, making home ownership unaffordable for too many, according to the Home Builders Federation.

‘Huge Boost’

The proposed mortgage indemnity guarantee “will be a huge boost to house building,” Stewart Baseley, executive chairman of the London-based lobby, said in a statement. “Since 2007, the biggest constraint on homes being built has been mortgage availability.”

The guarantee goes further than the 250 million-pound FirstBuy program and the previous government’s Homebuy Direct initiative, both of which have helped lift new-home sales, particularly to first-time buyers.

The government also proposed a 400 million-pound fund to revive some “spade-ready” projects for an estimated 133,000 homes that have stalled because of the lack of development finance. A separate 500 million-pound fund will restore spending that was scrapped to finance roads and other infrastructure needed to make developments viable.

The government pledged to release land suitable for developing an additional 100,000 homes while confirming steps to boost provision of social housing and private rental properties.

Social Housing

Tenants in social housing will be entitled to purchase their homes at discounts of as much as 50 percent of the market value, the government said, pledging to replace each home sold with a new one.

The overall plan is a “welcome first step towards a coherent and long-term vision for house building in this country,” said Ian Fletcher, a director of policy at the British Property Federation lobby.

Efforts to boost investment in rental properties, through partnerships with homebuilders or other measures to attract investment from professional money managers, were also seen as positive by companies.

The government “has got its head round the fact that it’s all right to rent,” said Nick Jopling, executive property director at Grainger (GRI) Plc, the U.K.’s largest publicly traded residential landlord.

Grainger is trying to raise a 150 million-pound fund to invest in new residential properties.

To contact the reporter on this story: Simon Packard in London at packard@bloomberg.net

To contact the editor responsible for this story: Andrew Blackman at ablackman@bloomberg.net

Bloomberg reserves the right to remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.