Right at the end of a fine article titled "House builders' write downs could rise to £13 bn" in ContractJournal.com:
The FT explains that the £13.3bn write-off outlined by Merrill would exceed the £11.3bn of pre-tax profit reported over the past decade... “You have to question whether house builders delivered any added value by building houses as opposed to just reaping profits by sitting on their land banks. Until the whole write-down exercise is over, we won’t know.”
Regular readers of this 'blog will be well aware that land values fell by about three-quarters between 1988 and the mid-1990s. I see no reason to assume that it will be any different this time around, possibly worse as we appear to be starting from a much higher level.
Monday 3 November 2008
Observation of the decade
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10 comments:
You're enjoying this, aren't you? :o)
The concept that land values will tumble is disingenuous. Sure a few people will get a bargain at auction, as people are forced into selling land they can't afford to keep, but their choice of land to buy at those prices will be pretty limited.
Sure the rate of repossessions as a percentage is up hugely - but since it was virtually nothing last year it palls in to insignificance when compared to the number of property sales that went through back then. If they put the number of repossessions against the number of property based mortgages in the country it might merit some interest.
Simply put - No one's selling, no one's buying. Some people with pots of cash and sound business acumen will make money out of people who couldn't afford to borrow what they did and must now fire sell property. Property values will be corrected downwards, but in the long term not at the rates seen today.
OTC, yes. Hence the new slogan in my header.
AC, you haven't explained why it will be any different to the early 1990s. House prices fell and land values tumbled. House prices are now falling even faster and land values are tumbling even faster...
As to long term, this is the fourth property bubble/crash since WW2, it's the same every time.
Mark, My old Dad was a small spec house builder. Started in about 1947 and went on until he died in 1989. He knew how to add value to a site which most current developers do not. In investment terms they do not know how to add alpha.
The old man used to do a test calculation each year to see whether he could build and sell what he considered to be a house suitable for FTB's. By 1988 he couldn't. His sums also told him that he could not explain how other developers were making money. The point he was making is that you price the house in today's prices but you sell at tomorrow's. The excess is land price inflation and it is that you need to replace your land bank. If you think that the inflated price is profit you are doomed.
After he had died I was working for a major housebuilder who had bought a site that he had bid for. From memory his bid had been about £600,000 but the housebuilder had paid £1.3m. As housebuilding costs are the same whoever you are, clearly this was a daft purchase (or the old man had been wrong). When the builder gave me a hard time for not selling his houses in the 1989/1990 last house price debacle I decided to put him straight on the facts about overpaying for a site. (Lola down the road shortly thereafter!).
They never learn. There are very few real spec housebuilders out there now. Laurie Barratt had it but I do not know anyone else who does. Many good developers know how to sell on land if it makes sense and if there is cash in it. But I am sure than a vast majority of the recent profits made by all developers (especially BTL 'developers' and other house do-er uppers) are entirely illusory.
L, exactly. You and your paterfamilias understood this. But e.g. Taylor Woodrow clearly didn't, having bought out Wimpey last year in what appears to be a largely debt-financed cash deal. All that value has gone up in smoke. How dumb are they, I wonder?
Yeah, well. Trouble is when you have seen it before you do not believe it ever again. Everyone else is cleverer than you and it is always 'different this time'.
No. It. Isn't.
My files contain endless stories from the last 10 years of people who reckon they could be 'developers'. All of them working on the illusion of the land price inflation. Bonkers. Just bonkers.
L, it's even more cruel than that.
Even ignoring the windfall gains from land price bubbles (and corresponding windfall losses); in economic terms, builders make 90% of their profits from getting planning permission. Yes, this is a long, drawn out, stupid and expensive procedure, but that's where you make the money. Worst case you don't get planning and you're back to square one and you try again a few years later.
Actually doing the good honest physical building is just a slog that in the grander scheme of things is not particularly profitable.
Oh I agree, but that is the true skill of a 'developer'. He (or she) sees the potential alternative use for the site and can see how they can add 'alpha. The planning process is just one annoying phase in realising the vision. And of course LA bureaucrats hate anyone making money like that. They see the planning approval as adding the value. No it doesn't. It's the vision of the speculator prepared to risk his time and capital. The LA planners add no value at all.
L, I have to disagree slightly - it's the surrounding amenities (whether man made or natural; privately or publicly funded) that create most of the value, a good developer just works out what is the best thing to build on any particular site.
In an ideal world, the planning department would just be a referee between competing interests - for example, if a developer bought a little park, he might maximise his own position by putting up a block of flats, but surrounding property values would fall.
That's one of the advantages of LVT - the planner just needs to balance the increased LVT receipts from the block of flats with the fall in LVT from the houses that don't have access to a little park any more. Or the planner could snap up the park on local residents' behalf, using their money.
Fair enough, but that not 'planning' as such. It's local people deciding what they want. Trouble is there is a now a disconnect between LG and the residend the opposite may be true if building on the park makes a school viable by increasing the potential number of pupils.
Most economic actions have an externality cost. Sometimes it's in the price and sometimes it isn't.
In any event most small developers change the density or property type. Big developers (and we are talking about housebuilding here) need larger greenfield sites or other major change of use (docklands for example) to work on because their overheads need feeding. And this IS more about manipulating planning.
Overall there is no one answer. But the 'no alpha' argument stands for the last ooooo 10 years. It's an interesting discussion tho'.
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