Britain's House Party Poopers

If the mortgage market remains open, Britain will keep building.

U.K. homebuilders enjoyed a comfortable existence -- until Brexit hit.

Mortgage Approvals

Low interest rates and help for first-time buyers have fueled a surge in mortgage approvals

Source: Bloomberg

Low mortgage rates, limited housing supply, a strong labor market and government home purchase subsidies all combined to spur sales and lift transaction prices. The Bloomberg U.K. Homebuilder Index quadrupled in the five years before the country voted to leave the European Union.

House Party

It's been a fat few years for UK homebuilders but investors think the good times are over

Source: Bloomberg

Now, Brexit has shattered the comfortable assumption that U.K. house prices move in only one direction and that building homes is a one-way bet. Still, the sell-off in homebuilder stocks is starting to look indiscriminate and overdone.

It would be remarkable if Britons decided en masse that now is an ideal moment to purchase a new home. A fall in house prices and transaction volumes is to be expected.

Given the pound's slump, it's understandable that buyers from outside Britain are dumping domestically-exposed stocks like the builders. In U.S. dollar terms the Bloomberg homebuilder index has tumbled 42 percent since Brexit (expressed in pounds, the decline is a less stomach-churning 31 percent).

While it's reasonable to assume an unpleasant few weeks for the homebuilders, it will take a lot to dissuade property-mad Britons that renting is preferable to owning your own home.

Brexit Pain

Persimmon has underperformed rival Berkeley since the U.K. voted to leave the EU

Source: Bloomberg

Take Persimmon, which has about a 9 percent share of the new-home market. On Tuesday, it became one of the first homebuilders to issuing a trading update following the referendum.

So far, it's seen only a few purchase cancellations, but it's still too early to assess the full impact of Brexit. The vote only place just a week before the end of the first half.

Even so, there are reasons to pare instinctive bearishness: Persimmon doesn't operate in London and focuses instead on first-time buyers and the lower end of the market. Its average first half sale price was a little more than 200,000 pounds ($263,000) -- which might buy you a one-bedroom flat in a distant London suburb.

So while it won't benefit from foreign billionaires taking advantage of the pound's decline to snap up a stately pile, Persimmon shouldn't be hit as much by job cuts in the financial industry. That's unlike Berkeley Group, which is more focussed on London and south-east of England.

Like many of its peers, Persimmon also has some balance sheet flexibility. It had 462 million pounds in cash at the end of June -- a nice cushion that should enable it to continue funding shareholder payouts even if transactions volumes and prices take a turn for the worse.

The company plans to return 110 pence a share to investors over the next five years which equates to an 8 percent yield at current prices. That's a big premium over the ten-year U.K. gilt, which yields less than one tenth if that.

In the event that home sales plummet and cash reserves evaporate, the developer can always cut spending. Halting land purchases isn't terribly helpful (it can take years to get planning consent in the U.K.) but it's a useful way to conserve cash if the going gets really tough.

Ultimately, the industry's fate will be determined by the availability and cost of mortgages. If anything, rates are surely likely to fall after Brexit as the Bank of England cuts rates further.

Providing the country's banks are able to continue providing mortgage finance -- a profitable business that banks will be determined to cling on to -- Persimmon looks surprisingly well-placed to ride out the Brexit storm.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

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