Property market will slump for three years, say experts

Jun 18 2008

Predictions of a three-year slump in the property market dealt a fresh blow to shares in the UK’s major housebuilders today.

Investment bank Goldman Sachs warned that house prices could fall 6% this year and 8% in 2009 as sales volumes plummet.

“The UK housing market is only at the start of a deep downturn, which could last up to three years, in our view,” analysts said.

The downbeat verdict sparked another sell-off in the beleaguered sector. Charles Church builder Persimmon fell 8% in the FTSE 100 Index - wiping around £100 million from the company’s value.

In the FTSE 250, Taylor Wimpey’s shares tumbled almost 16%. Redrow and Barratt Developments were 14% and 11% lower, while Newcastle-based Bellway lost 10%.

Goldman’s warnings came ahead of what is expected to be a flurry of poor news from the sector when housebuilders begin reporting trading updates next week.

Goldman said there was another three years of misery to go if the current slowdown was similar to the falling market between 1988 and 1993 - although this depended on the impact of the credit crunch easing.

“We believe the sharp contraction in mortgage availability has accelerated the house price correction and as a result, the downturn should be shorter than in the early 1990s.

“However, we believe that this is highly dependant on lending banks returning to the market with competitive mortgages,” analysts said.

It warned investors should “focus on fundamentals” amid the worsening prospects and avoid companies with high borrowings.

Recent rounds of takeovers have put balance sheets under increasing strain. Barratt has been saddled with debts of £1.7 billion after buying Wilson Bowden at the top of the market last year.

Speculation has grown over the potential need for builders to strengthen their finances with rights issues or debt for equity swaps as the market turns downwards, although reports of a possible bail-out by City investors lifted shares on Monday.

Barratt and Taylor Wimpey are the candidates most likely to need a capital injection “resulting in significant dilution of existing shareholder stakes”, the investment bank said.

But it also warned the funding raising moves “may not be well supported” given the uncertainty over the extent of the problems.

“In the downturn at the start of the 1990’s several companies actually had to return to the equities market more than once, in 1991 and 1993.”