Rising UK House Prices Despite Deteriorating Economy; Focus on Taylor Wimpey & Crest Nicholson

Summary

• UK GDP has fallen by 20.4 per cent in the quarter ended June 2020, putting the country into recession
• The average housing prices in London rose by 4.7 per cent year-on- year to March 2020.
• Halifax house price index stated that average house prices in July were up by 1.6 per cent month on month

Just as the housing market in the United Kingdom started to show signs of revival, it was nipped in the bud by the coronavirus pandemic. The past three years had been exasperating for the industry living through the extreme pre-Brexit weather and just as the economy started to show signs of revival post- December 2019 general elections results, disaster struck, and the whole country came to a standstill. Such a precarious economic condition of the country has not been witnessed since a very long time.

During the unprecedented crisis, most of the business activities came to a screeching halt. The government had launched a lot of support schemes to help the businesses stay afloat through the coronavirus crisis. The government also launched job retention schemes to protect jobs. Most of the businesses in the UK are sitting on a debt pile now. In addition, due to lesser interest rates prevalent in the economy, the revenue streams of the financial institutions have been hit. The banks have set aside a huge sum of money as provisions to cover these potential losses.

All these factors had hinted towards a recession, this got confirmed with the GDP (Gross Domestic Product) falling by nearly 20.4 per cent in the quarter ended June 2020, according to data from Office of National Statistics (ONS). There was a drastic decline in GDP in comparison to the first quarter ended in March 2020 (Q1 2020: minus 2.2 per cent). UK businesses witnessed a slight uptick in economic activities as the lockdown was lifted in July. The second quarter ended June 2020 witnessed a plunge in construction output, production, and services sector.

Do Read: UK GDP To Contract More Than Any Other G7 Nation in the Second Quarter

What is moving the UK house prices?

Meanwhile, the housing prices across the UK seem to be unfazed by the prevalent conditions in the economy. As per the release from ONS, the average housing prices in the UK rose by 2.1 per cent year-on-year to March 2020. The average housing prices in London rose by 4.7 per cent year-on-year to March 2020. According to the recent release by Halifax house price index, average house prices in July were up by 1.6 per cent month on month.

Do read: What Is Moving the Stocks of UK Housebuilders Higher Amid all the Uncertainties?

The market is experiencing a sudden spike in property prices since the easing of lockdown. This could be because of the release of pent-up demand from the period of lockdown in the housing sector. In addition, lesser supply of ready to move homes is pushing the housing prices upwards, as the construction activity remained shut for all the lockdown period.

The Chancellor of the Exchequer, Rishi Sunak, in the summer statement announced holiday on stamp duty till 31 March 2021. Which also seems to have increased the confidence of the potential home buyers and property agents; the future for the housing sector looks promising in the near term.

However, the outlook of the sector still looks gloomy in the long term. According to data from the ONS, the construction output grew by a record 23.5 per cent for June 2020 month on month. In addition, the number of new orders declined drastically by 51.1 per cent in the second quarter ended in June 2020 in comparison to the previous quarter (Q1 2020).

In this article, we would like to put a lens through some housebuilder stocks. Investors need to be watchful of these stocks as they might have these in their portfolio or watchlist. Given the prevailing circumstances in the economy, timely informed decisions could help in protecting the gains/capital.

• Taylor Wimpey Plc

Taylor Wimpey Plc (TW.) is a leading residential housing developer and real estate company having most of its operations in the United Kingdom. The company's production activity was significantly impacted by the Covid-19 pandemic, leading to an impact on the completion levels for H1 2020. The sites and sales centres were closed from 23 March, but the employees returned to site at reduced capacity between 4 May and 29 May. Sales centres re-opened between 22 May and 29 June, resulting in a material impact on financial performance.

There was a decline in the total home completions (excluding joint ventures) by 57.6 per cent to 2,771 (H1 2019: 6,541). The company saw an increase in sales rate from 0.30 (during shutdown) to 0.70 by June end, a 206 per cent increase in appointments booked, and a 50 per cent increase in website visits, year on year. There remains a high degree of uncertainty in the near term from both the impact of COVID-19 as well as the Brexit. On 13 August 2020, at the time of writing (before market close, GMT 09:00 AM GMT+1), Taylor Wimpey Plc’s shares were 2.03 per cent down higher its previous day closing price and were trading at GBX 123.05. 

• Crest Nicholson Holdings Plc 

Crest Nicholson Holdings Plc (LON: CRST) is the UK domiciled residential development organisation with a major presence in Coastal and Southern parts of England. The organisation has a varied home portfolio developed for first time home purchasers that also includes huge family-size homes.

In the first half of 2020, the company recorded a lower adjusted gross profit of £35.9 million due to lower land sale contribution and receipts impacted by Covid-19. The company cancelled dividend payments for the period. The company’s net debt has increased substantially to £93.3 million during the period. The company has additionally secured £300 million facilities under the CCFF scheme.

In the wake of the novel coronavirus, the company has reduced the selling prices for residential units by 7.5 per cent. In addition, it has reduced the selling prices for commercial units by 32 per cent. In the first half of 2020, the company has completed 775 homes and added 422 plots due to controlled activity. As a part of its long-term strategy, the company has acquired 1,057 plots on 3 sites. However, the environment in which the company operates remains uncertain. On 13 August 2020, at the time of writing (before market close, GMT 09:02 AM GMT+1), CRST shares were 0.26 per cent up against its previous day closing price and were trading at GBX 192.50. 

Due to the carnage caused by the novel coronavirus, there are a lot of uncertainties persisting in the market. The government’s employee support schemes are likely to be called off in October 2020. The real impact in the housing market would become more apparent in the upcoming months. To worsen the situation further, the weakened labour market could drive the housing prices southwards in the near term.