Alex Brummer

Investment special: Gaining from a housing recovery

How to profit from a revival of the housing market

Investment special: Gaining from a housing recovery
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The long period of dormancy for Britain’s housing market looks as if it is coming to an end — though there are huge regional differences.

Central London remains exceptional, with the influx of overseas buyers into Kensington, Chelsea and adjoining neighbourhoods creating a microclimate of surging prices that has little to do with economic fundamentals — and has the political left salivating at the thought of a ‘mansion tax’ on properties worth £2 million-plus, even if that means turfing elderly widows out of family homes.

Some five years on from the financial crisis that brought many lenders and house-builders to their knees, there are signs of a broadly based recovery. The improvement has already led to a sharp rise in builders’ shares and encouraged one of the victims of the financial crisis, Crest Nicholson, to return to the stock market in mid-February. Its shares immediately rose from an issue price of 220 pence to a handsome premium at around 265 pence.

A return to health for Britain’s housing market will be a key element in any wider recovery. Broadly the data has been improving for some time. Mortgage approvals, the most reliable forward indicator of the housing market, climbed to 55,800 in December, their best level for nearly a year. Similarly, new buyer inquiries, as measured by the Royal Institution of Chartered Surveyors, have been increasing sharply. Estate agents report record numbers of house hunters in January.

A key factor behind the more upbeat market picture has been the Bank of England’s £80 billion Funding for Lending scheme, which has been more successful in bringing down the cost of mortgages than in stimulating loans for small and medium-sized enterprises. The cost of fixed-rate mortgages has dropped to its lowest level since the autumn of 2011, although the cost of variable-rate home loans has crept up slightly. Reports on prices so far this year are mixed, with the Halifax recording a 0.2 per cent decline in January and the Nationwide a 0.5 per cent increase plus a further 0.2 per cent rise in February.

Bank of England deputy governor Paul Tucker is making clear that the authorities stand ready to keep credit flowing to households and businesses using a combination of quantitative easing and Funding for Lending, and are even flirting with the idea of lower or negative official interest rates.

Investors wanting to take advantage of this housing recovery have several routes to choose from. The first and most direct is to buy the shares of house-builders. The reporting season for these companies has demonstrated their capacity for recovery. Persimmon, the biggest of them by market value, says that in the first eight weeks of 2013 it has seen mortgage rates fall by as much 45 basis points as a result of Funding for Lending and schemes such as ‘First Buy’ for those starting to climb the housing ladder. Persimmon shares have climbed 40 per cent in the last year — a rise that might, of course, deter new investors. Like others in the sector, including Taylor Wimpey, Redrow, Bovis and Barratt Developments, Persimmon has been benefiting from land banks picked up cheaply from distressed sellers in recent years. This has allowed builders to stretch margins and increase profits. Much of the new building is taking place in the prosperous south, and consists of more expensive family homes.

Persimmon is among those adding to its land bank, and has enough supply to last almost seven years at current rates of expansion. Another apparent winner is Bovis Homes, whose recent results were well ahead of expectations. It’s worth noting that three-quarters of Bovis’s land bank is in the south, giving it several years of potential growth providing credit remains plentiful.

A second way to ride the housing recovery is through buy-to-let — worth considering for investors in search of an alternative to private pension schemes, which have been badly hit by the fall in annuity rates as a result of quantitative easing. Rental demand has been relatively robust because of the continuing barriers to home ownership, notably the higher deposits demanded by mortgage lenders from first-time buyers. While the long period of record low interest rates shows no sign of coming to an end, gross rental yields currently stand at 5 to 6 per cent — which is relatively low on historic measures but easily outpaces the returns on bonds or cash deposits, and yields on the stock market. Plus there’s the added advantage, especially in the south, of rising capital values. In response, figures from the Council for Mortgage Lenders show that 36,700 new buy-to-let loans were advanced in the final quarter of last year, worth £4.9 billion — the highest level since late 2008.

A third alternative, and the newest investment game in town for people seeking to be players in the housing market, are housing association bonds, some of which carry local government guarantees. More than £4 billion was raised for this sector last year, the bonds being favoured by some pension funds and insurers because of the associations’ secure, long-term business model. Returns are very modest, however, with the most recent £42 million bond issued by ‘Places for People’ in January offering a current yield of just 1 per cent. So think of this as an investment with gilt-like qualities, but a more direct social purpose.

In summary, a low-interest-rate environment has helped to revive house-builders who have produced dazzling results in the past year and seen their share prices shoot up; but with the Funding for Lending scheme here to stay and plenty of people looking to buy or rent, opportunities for profitable investment in the sector remain.

Alex Brummer is city editor of the Daily Mail.