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thedebtisreal

Housing Bull Found! (sort Of)

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There are still some bulls of bricks and mortar. Tony Pidgley, managing director of Berkeley Homes, spent Pounds 2m this week buying shares in the company that he founded 33 years ago.

Mr Pidgley, described by one industry journal recently as "Britain's most influential housebuilder", has an enviable record of calling the property market. He liquidated most of his assets before the crash of 1989 and was one of the first housebuilders to realise the potential of urban, or brownfield, development.

Should investors follow his lead and buy back into the sector?

Housebuilders have been the worst performers in the UK market this year. Rising interest rates and tighter credit conditions have made investors flee the sector, which is down 33 per cent on the year to date. The next biggest faller is real estate, off 27.8 per cent.

The selling has accelerated since the "run" on stricken mortgage lender Northern Rock began, with hedge funds betting that the UK housing market is heading for a US-style slowdown.

Surveys have added to the gloom. A report by Rightmove, the property website, showed that average asking prices had fallen 2.6 per cent in September.

While it is dangerous to extrapolate from one survey, it is worth remembering that the last time UK house prices fell, housebuilder profits plunged.

Sector watchers are loath to say housebuilding stocks are cheap because earnings could fall sharply in the next 12 months.

Graham Secker, UK strategist at Morgan Stanley, says: "While headline valuations for the likes of the retailers and the housebuilders may look attractive, investors should remember that these sectors are highly operationally geared and that the downgrades (which haven't really started yet) are likely to be significant. For example, in the early 1990s, housebuilders' earnings fell 85 per cent on the back of a 15 per cent decline in house prices."

There seems little doubt that the sector is headed for a tough six months. Citigroup expects zero house price inflation in 2008 because of tighter credit conditions and the fallout from the Northern Rock debacle.

Nonetheless, there are good reasons for thinking the UK will avoid a US-style housing slowdown.

While many pundits have drawn parallels, Clyde Lewis, analyst at Citigroup, believes there are meaningful differences between the two countries. "First, the supply of housing has barely changed in the UK, unlike the US where there has been excessive amounts of stock built up in the last few years. Second, the subprime issue is nowhere near as extreme as the US."

Mark Hake, analyst at Merrill Lynch, also thinks UK house prices are underpinned by a supply/demand mismatch.

"We are building at an annualised rate of 185,000 versus government forecast demand of 230,000. The UK has not responded, unlike the US market, by building more houses because of a tough planning regime which constricts land supply," Mr Hake wrote in a note this week.

He also points out that UK interest rates appear to have peaked, which should help offset any impact from increased financing costs.

City traders take a different view. They reckon institutional investors will shun the sector until it is clear how the credit crunch and Northern Rock crisis affect the wider economy.

They also point out that Berkeley, which is focused on London, is not a typical housebuilder.

It has changed its business model to focus on cash flow rather than on boosting profit and Pounds 12 a share is being returned to shareholders via a series of special dividends.

Company watchers expect the final 500p to be returned by April 2009. All of which may explain why Mr Pidgley has been adding to his holding this week.

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"A report by Rightmove, the property website, showed that average asking prices had fallen 2.6 per cent in September"

August?

You cant use RM figures as a good yardstick. Figures were distorted by the lack of 4 bed properties. For an accurate snapshot of how the market is going, we need to look to the Land Registry figures.

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Good article about him in the guardian.

Seems that berkeley hasn't geared up nearly as much as other property developers, and since its share price has been hit just as badly as the other developers who probably are pretty exposed in the current credit situation then buying back his shares is probably a smart move.

In the midst of the Northern Rock crisis, he feels happy that his "good old-fashioned" values mean that Berkeley has resisted gearing up and has £100m in the bank.

"If we go through a bit of a bad time, we'll have a little bit less profit. That ain't quite the end of the world." He thinks there might be a minor slide in house prices in some parts but doesn't foresee a crash. "My view would be this little correction would be time to get on the ladder. But I would say that wouldn't I?" He says if there is a recession he would rather be in the London market than anywhere else.

At least he's honest about being a VI :)

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You cant use RM figures as a good yardstick. Figures were distorted by the lack of 4 bed properties. For an accurate snapshot of how the market is going, we need to look to the Land Registry figures.

I'm not even a fan of Land Registry, it takes too long to compile any kind of data. Needless to say, taking just one months results of any index is a bit dumb. But I think that rightmove drop has really hit sentiment. The press seem to be building a housing price crash narrative at the moment.

Regarding the article, it is interesting to see who is not swimming naked.

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