How much has the recession cost house builders? um…
During a conversation with a colleague on the recent spate of cash calls by house builders I was quizzed on how much damage the recession had done to their balance sheets.
I made a stab (a lucky guess as it turned out), but I should have had a number at my figure tips. I waffled while I grabbed a calculator and tapped in some very rough and ready numbers.
Well have a guess how much that bit of number crunching came up with?
Here’s what the numbers suggest:
- Plot costs down from about £44,000 at peak to £31,000.
- Say four years land banks at 200,000 units a year at peak
- That makes the value of land banks at peak, say, £35 billion. That same land would be worth now about £25 billion. So a rough drop of about £10 billion on land alone.
- Add in the restructuring costs and finance costs and we have a fair slab more.
So chances are, to answer his question, we are probably somewhere in the £10 billion to £15 billion range.
A quick reality check, looking through the accounts of the six big traditional stock-market-quoted house builders, finds they produced about a third of the homes in 2007, had just shy of 300,000 plots and between have recorded exceptional costs of around £4 billion as a result of the recession, much of which was write downs on land.
Times that £4 billion or so by three and we are in the same ball park.
Some will argue that land has fallen further. It may have, but not all land on the books of house builders would have been priced at peak prices. So theoretically the pain may have been greater in terms of the potential asset value at peak.
It’s silly to read too much into this sort of calculation, but it is instructive and provides a notion of the scale of the financial pain in house building.
That of course is just one way of looking at the damage of the recession.
Meanwhile, what caught my eye on the subject of scale, was how the balance sheet losses suffered by residential developers and house builders seems to be rather in the same league as the money £13 billion the Homes and Communities Agency has for the next two years.
One thought on “How much has the recession cost house builders? um…”
Brian
The house builders may have had to write down their land, but now that house price inflation is returning in the second “Brown Bubble” the value of that land will return.
The reason is simple. The house builders own planning approvals, attached to land. The value is in the planning approval, which no-one else has, not so much the land, which with so much farmland around in any locality outside the urbs, is largely substitutable. The situation is different in previously developed areas, where land is more location specific, but the value of the planning approvals that attach to that urban land are also supported by the fact that people are not free to build on farmland more cheaply, and rely on something of a commute.
Gordon Brown needs the return of house price inflation to be seen by the electorate by the next election. The house builders will enjoy an uplift in their land values as the average house price goes over the 2007 peak to a new and almost unimaginable height, totally divorced from average household income.
That is possible with less social mobility, and the house builders going for the luxury eco-homes market among the top quintile of earners, or among the “asset rich and income poor” sections of society.
The house builders will content themselves with 100,000 homes a year to realise their planning approvals. That is fine for them, but a permanent halving of the market for construction materials, and the demand for trade labour.
That’s my prediction.
As you say, we can’t read too much into a fall in the land value. It is temporary.
Regards
Ian Abley
http://www.audacity.org
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