Fun with numbers

From City AM:

Last month Persimmon chairman Nicholas Wrigley and Jonathan Davie, the chair of its remuneration committee quit, after it was revealed Fairburn along with 140 senior management were in line for payouts totalling an estimated £800m in aggregate...

Persimmon said it has made a "significant contribution to increasing UK housing supply" since 2012 by building more 80,000 new hones. Annual production has jumped by 70 per cent and cash coffers swelled in 2017 jumping, from £913m to £1.3bn.

Let's be generous and assume that the bonuses relate to the whole five year period.

£800 million ÷ 80,000 homes = £10,000 per home.

Based on an average selling price of a Persimmon home of £225,430, the SDLT for a first time buyer would be £nil and for a second home buyer it would be £8,771.

Funny how the likes of City AM/The Taxpayers' Alliance wail about Stamp Duty Land Tax but not the extra £10,000 which these companies can charge for a home (largely because of Help To Buy). City AM's editorial even praises such bonuses (Bonuses are the best motivators we have)!

We own land! Give us money!

From The Daily Mail:

NewBuy aims to help buyers onto the housing ladder by allowing them to buy a new home with just a 5 per cent deposit because the housebuilder and Government back the loan.

But it is already on the rocks after housebuilders backing the scheme say buyers are being priced out, as they can’t afford their mortgages. NatWest offered the best initial rate when the scheme was launched on March 12. This was 4.29  per cent for a two-year fixed-rate and 4.99  per cent for a five-year fixed-rate. However, its new two-year deal is 4.79  per cent and the five-year deal 5.49  per cent. This means a buyer of a £150,000 home who missed out on the lower rate on the five-year deal would end up paying £44 a month more, or £2,640 extra over the five-year mortgage...

Mike Farley, chief executive of housebuilder Persimmon, says: "There’s nothing wrong with the concept of NewBuy(1), but to make it work we need a lower rate or people will be priced out. The rates are around 6  per cent and are so high people won’t be able to afford the repayments.(2) I could understand the rates being so high if the lender was taking on all the risk, but that is not the case.(3)"

He said the homebuilder has managed to sell only 70 properties through the scheme so far.(4) Persimmon and other builders signed up to the scheme are to meet this week to discuss their next steps.(5)

*sigh*

1) There is everything wrong with it. The clue is the fact that the name of the scheme is two words joined together with each word capitalised, a traditional NewLabour gimmick.

2) First time buyers could easily afford to pay 6% interest or 10% or 15% or anything else, because that's only one part of the equation - the more important part is the actual loan amount. If Persimmon dropped the price of their homes by half (i.e. waived most of the land value element), then buying one of their homes with a 10% interest mortgage would be a pretty good deal. But as a true believer in Home-Owner-Ism, he sees the selling price as a fixed quantity and works backwards from that in deciding what the interest rate 'should' be.

3) He thinks that he can charge as much as he likes for his crappy houses, and banks respond in kind by suckering people in with low interest rates and then turning them into mortgage prisoners. At least with a normal protection racket you can shut up shop and move elsewhere, eh?

4) This is what we've come to expect from all the similar schemes dreamed up by previous government:

The [HomeBuy Direct] scheme was announced on September 2, 2009 - but it took until March this year for it to open for business. But so far demand has fallen some way short of the early hopes. The government wanted to help 18,000 families - so far, it has helped just 215.

5) No doubt their next steps will be to persuade the government to set up a taxpayer-backed scheme to subsidise mortgage prisoners who want to trade up to a bigger mortgage, maybe they can call the scheme NextSteps or something?

*/sigh*

The Wit & Wisdom of Persimmon's Chief Executive

From The Telegraph:

Mike Farley, chief executive of Persimmon, the UK's second largest housebuilder, said home buyers were still finding it difficult to secure mortgages, particularly on new homes. "It makes absolutely no sense that some lenders won't offer as high a mortgage on a new home as they will on a second hand house. We need more competition to change this," said Mr Farley.

Well duh.

It makes absolutely perfect sense, partly for the reasons that Drewster explains at comment 2 at HPC; partly because there appears to be a "new house premium" of 5% or 10%, which clearly disappears after a couple of years*, and partly because of the risk that there is subsidence or something which is far more predictable/manageable with older homes.

To use a crude analogy, if somebody buys a second hand car for £5,000, it will lose value at £500 a year, but if they buy a new version of the same model for £15,000, it will lose about £5,000 in value in the first year or two. So if you are in car finance and expect the loan to be repaid over three years, you'd be comfortable lending the the buyer of a second hand car 70% of its current value, but you'd only lend the buyer of a new car 60% of its current value; and if you did offer a 90% new car loan, you'd have to charge a higher interest rate.

And 'more competition' will not have the slightest effect on the difference between new and existing houses.

* FormerTory in the comments reminds us about 'incentives', so what I should have written is: "there appears to be a "new house premium" of 5% or 10%, which clearly disappears after a couple of years; and 'incentives' can inflate the official selling price by another 5% or 10%, which is purely fictitious value that never existed."

Observation of the decade

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.

Land prices plummeting, as predicted

Persimmon has written down the value of its land bank by a further £600 million, on top of the £40 million write down at half year stage.

That's a handsome write down of 17% of the value of 'inventories' as at 30 June 2008, barely four months ago, i.e. their land values are falling at 4% a month, two or three times as fast as house prices generally.

Which stacks up mathematically: if half of the cost of a home at the 2007 peak related purely to the site-only land value, and the value of the bricks and mortar is stable, then you'd expect underlying land values to fall twice as fast as total property values.

"Stamp duty axed below £175,000"

Woo hoo! They are getting desperate now.

As the BBC helpfully point out in the second paragraph "The current £125,000 threshold will be raised from Wednesday in a move aimed at kick-starting the housing market." So, big deal. Further, with prices falling faster than 1% a month, all a purchaser has to do is delay his purchase by a month, then another month, and another ...

We know that even a complete Stamp Duty holiday wouldn't work. The Tories tried it in 1991; it didn't work then and it won't work now.

This "30% interest free loan" idea won't work either.

The gummint appears to have overlooked the fact that the larger homebuilders, e.g. Bovis, Persimmon and Taylor Wimpey have been offering what are effectively interest free loans of 25% of the purchase price for months, has that 'kickstarted the market' for newbuilds? Nope.

Economic illiterates of the day (8)

From the weekend FT:

Grant Shapps, shadow housing minister, said it was time for the government to take measures to help consumers buy homes ... The most urgent need was to scrap stamp duty for most first-time buyers purchasing homes worth less than £250,000, Mr Shapps said in an interview with the FT...

F***ing hellski, it's almost as if they've been taking advice from Krusty Allsop ... oh ... they have!

As Fred Makepeace explains in the comments to that last link "...if you scrap stamp duty it will simply lead to an increase in the price of housing. Therefore the first time buyer is no better off and our Government loses an income stream. It's very basic economics surely!!!". Secondly, as spiteful as Stamp Duty (more correctly, 'Stamp Duty Land Tax') is, it is only 1% up to £250,000, so with prices falling at nearly 1% a month, is that problem not sort of ... er ... dealt with? Finally, mucking about with SDLT will do bugger all help to those poor mugs who have overstretched themselves and are looking at unaffordable interest-rate hikes.

Ministers could also help the market by scrapping home information packs and by removing the density targets that made housebuilders produce flats instead of family homes, he said.

Sure, HIPs are a load of rubbish, but it's only a few hundred quid wasted, they cost a fraction of what the vendor has to pay the estate agent. We shouldn't have 'density targets' anyway, if you leave it to the markets (rather than politicians, Greenies and NIMBYs), we'd probably get the right number of the right-sized homes being built in the right places. So half-marks for that last bit.

Similar measures were demanded several weeks ago by the Home Builders Federation as it warned that many of the industry’s 300,000 jobs were at risk from the freeze in the market.

Dear Homebuilders! Wake up and smell the coffee! If you can't shift your homes, then drop the prices! If you wrote down your land-banks to market value, then you would notice that you could still build and sell houses at a profit!

It appears the homebuilders have got their heads firmly stuck in the sand. Instead of dropping headline prices, they are coming up with all sorts of gimmicks - the latest being an interest-free loan for a quarter of the price, as perpetrated by Taylor Wimpey and Persimmon.

Persimmon - feel the fear!

Persimmon have come up with a raft of 'moving options' which are broadly similar to Redrow's, the main difference appears to be that Redrow will 'pay' your Stamp Duty Land Tax, legal fees and a 5% deposit but Persimmon will, effectively, give you an interest free mortgage on one-quarter of the property.

This still all looks a bit like mortgage fraud to me.