Bellway IMS – continuing upbeat tone among housebuilders

Alastair Stewart, analyst at Westhouse Securities, said:

We are maintaining our estimates after an in-line IMS for the four months to end-May and note that Bellway is continuing the upbeat tone among housebuilders, despite worries in the wider housing market over lending limits and potential regulatory constraints. We believe today’s Halifax House Price Index edging closer to the “danger zone” of 5x incomes may raise fears of an impending rates rise, which could more than offset Bellway’s sanguine tone in terms of share price sentiment in the sector.

Numbers look in line; no change to estimates

Guidance for the FY to July seems more or less in line with H1 outlook and our forecasts: a 20% increase in volumes (where we are and guidance of “up to 20%”); prices “slightly in excess of £210k” (we forecast £214k); margins “around 17%” (previously “16-17%”; we forecast 16.7%). We are 8% ahead of I/B/E/S consensus, which we expect to nudge upwards.

Market commentary is the main issue

Bellway is well regarded for its candour, we believe, so any change in tone might have been seen as significant. However, there is no change in the group’s view of the market, which it thinks remains “strong” and demand for new homes continues to be “robust”. Reservations during the period were up 11% YoY with “modest net pricing gains”. Help to Buy has been “an important selling incentive”, with 879 reservations taken during the period (probably around a quarter to a third of its private sales).

Housebuilders’ performance belies wider housing jitters

This continues the trend of housebuilders avoiding any sign of the wobbles affecting the wider housing market – possibly because of H2B. But we believe transactions and possibly prices could be threatened by: the current tougher regime under the Mortgage

Market Review; potential regulatory tightening on lending criteria following the 17 June meeting of the Bank of England’s Financial Policy Committee; caps of 4x income on larger mortgages from Lloyds and RBS; possible curtailment of either or both Help to Buy schemes; uncertainty in the run-up to the May 2015 General Election; and the ‘elephant in the room’, a rates rise.

Halifax House Price Index may have made the ‘elephant’ larger.

Today’s “unsmoothed” 10.6% YoY increase (+8.7% on a three-month YoY moving average) may raise fears over an earlier than expected price rise. But the key figure in our view in the data from Britain’s biggest lender is the house-price to income multiple of est.4.96x – up from est.4.77x for April and compared with a long-run average of 4.08x. This is perilously close to what we see as the ‘danger zone’ of 5x – it got to 5.83x in July 2007. Given the Bank of England’s (and leading lenders’) newfound interest in basic income multiples – rather than alternative affordability measures – we suspect this could feature in forthcoming deliberations at the Monetary Policy Committee.