Less Housing Angst in Britain?

British homebuilders don't face an inventory glut like in the U.S., so the lending freeze likely won't cause a crisis. But shares have fallen about 40% this year

The U.S. subprime mortgage crisis has rattled banks around the world, putting the brakes on lending, while U.S. housing prices are down and sales of new homes have plummeted. In Britain, the specter of a 1930s-style bank run on collapsing lender Northern Rock (NRK.L) shocked regulators and consumers alike. And after a dizzying 15-year runup, the growth in British housing prices looks likely to slow this year, to 9%.

Add it all up, and it sounds like a disaster in the making for big British homebuilders such as Barratt Developments (BDEV.L), Persimmon (PSN.L), and Taylor Wimpey (TW.L). But the surprise is that these companies look likely to weather the slump far better than their U.S. counterparts. "We have by no means seen the end of the downturn in the U.S. property markets," says Tom Gidley Kitchin, analyst at London-based stockbroker Charles Stanley (CAY.L). "In contrast, we're not going to get a massive fall in British house purchases."

The reason comes down to simple supply and demand. With a relatively stable population and a shortage of land, Britain hasn't seen the kind of speculative excesses that led to the home inventory glut in the U.S. New home sales constitute only about 10% of real estate transactions each year in Britain, vs. nearly 15% historically in the U.S. And with British housing still in short supply, analysts say prices and demand for both new homes and resales are likely to continue rising, albeit at a slower rate than during the last half-decade.

'Northern Rock Effect'

To be sure, times could get a bit tougher for builders. On Sept. 26, Britain's second largest developer by volume, Barratt, reported solid numbers for 2007, including a 25.3% rise in revenues, to $6 billion, and a 9.3% gain in pretax profits, to $861 million. But Chief Executive Mark Clare conceded the company experienced a short-term "Northern Rock effect" in early September, a reference to the $4 billion run on Britain's No. 5 mortgage lender that started on Sept. 14.

In the first few weeks of September—normally a strong season for new-home purchases—Clare says Barratt saw a sudden 10% decline in sales. He insists it's still too early to assess the broader knock-on effects, but he nevertheless gave more cautious guidance for 2008, citing rising interest rates and some hesitancy by home buyers resulting from uncertainty in the British economy.

Barratt shares fell 5.3% after the earnings announcement, but ended the day flat and have since climbed 3%. Overall, British homebuilders have seen their shares fall around 20% since early September and 40% since the start of the year.

Still, their situation is far better than the crisis facing American developers. Sales of new homes in the U.S. fell 8.3% year-on-year during August, to their lowest level in nearly a decade. On Sept. 25, the U.S. National Association of Realtors said the supply of unsold homes hit an 18-year high in August; the same day, Miami-based Lennar (LEN), the nation's largest homebuilder by revenue, announced a $514 million third-quarter loss on a 44% drop in revenue, to $2.3 billion.

Government Help

In Britain, by contrast, a continued shortage of housing has helped drive home prices up 90% since 2002, according to British mortgage lender Halifax (HBOS.L). Analysts predict 160,000 new units will be built during 2007, but to keep up with demand, the government has called for new home construction to rise to 240,000 units annually by 2010.

The government push for new homes has helped maintain stability at a time when other parts of Europe are feeling the pinch from a property slowdown after a long period of speculation. For instance, after years of double-digit growth, the Spanish and Irish housing sectors have been particularly hit by overbuilding and the financial market volatility. Home prices in Ireland are expected to drop by almost 6% year-on-year in 2007. Spain's downturn is less severe, but a 5.8% rise in prices in the 12 months ended July, 2007, was the slowest growth rate since 2000.

British homebuilders also benefit from a generally strong economy. Goldman Sachs (GS) predicts gross domestic product growth this year of 2.9%. And though the Bank of England has raised interest rates by 1.25 percentage points since July, 2006, the accompanying rise in mortgage rates hasn't dramatically slowed home sales.

"Homebuilders are in the driving seat as long as the consensus for building more homes remains and the economy stays strong," says David Stubbs, senior economist at the Royal Institute of Charter Surveyors. Such predictions are music to the ears of the country's homebuilders. After all, no one expected British property prices to sustain their growth this long. The strong desire for home ownership in Britain likely will keep builders smiling even as their U.S. counterparts face tough times.

For a look at housing prices around Europe, see our slide show.

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