Neil Collins’ Notebook – More yachts for housebuilders
They are having a wonderful post-Covid time at Persimmon. The buyers of their new homes are queuing up, the margins are fabulous, and the supply…well, you don’t want to build too many, too fast, do you? This week’s results positively glowed with financial health; profits and completions were both impacted, but recovery has been swift. The market loved the numbers and the prospects for big dividends later in the year.
Persimmon, you will remember, is the housebuilder whose remuneration committee failed to see that the then CEO could make a fortune if things went really well for the shareholders. His successor, who was awarded £40m from the same scheme, is off, and his successor has just departed ahead of schedule from bus operator National Express.
As the UK’s biggest housebuilder, Persimmon seems to be taking a bit more care when it comes to the buyers than it has in the past, with a “customer satisfaction” score up from 83 per cent to 90 per cent this year. Many of those new homeowners relied on the government’s Help to Buy scheme.
Since this is only available for newbuilds, perhaps they were grateful to scramble onto what many people still think of as the housing escalator. In fact, this escalator stopped some time ago, and the scheme has served principally to allow housebuilders to sell at inflated margins – in Persimmon’s case, £31 of every £100 of sale price is profit. In theory, Help to Buy (Builders’ Yachts) comes to an end next year, but seems certain to be extended by our spendthrift government.
The builders’ prospects have been further improved by the cut in stamp duty for most house purchases. This, too, is supposed to be temporary, but as with pensioners’ free bus travel, winter fuel allowances and so many other crowd-pleasing concessions, it will prove almost impossible to reverse.
The bungs to housing are more pernicious, and far more expensive. Help to Buy is forcing people into homes they hope they can afford, rather than homes they want to live in. Not only does the subsidy on the loan run out after five years, but the subsequent buyer will not get the same help. If the housing escalator is now in reverse, there will be a lot of unhappy homeowners.
Housebuilders would be even more unhappy, which is why they build out at such a leisurely pace, despite their thousands of available plots. Persimmon built 4,000 homes in the first six months of 2020. Pre-Covid, it built 7,584 in the same period last year, so its 89,000 plots would take six years to develop, even if it returned to previous construction rates.
Here is Bryce Elder in his Markets Now column in the FT: “Persimmon sales since July are up an hilarious 49% year-on-year as Help To Buy funnels all the credit-starved first time buyer demand towards the newbuild cartel, creating a giant sinkhole into which the whole housing market will shortly crash.” Oddly, nothing remotely similar appeared in the next day’s paper.
Another bank failure
Banks, we were told during the last financial crisis, are too big to fail. Of course, given their pivotal role in the economy, they are. However, from an investment standpoint, they have failed spectacularly. At 28p, Lloyds Banking shares are not much above the 23p they hit in 2011, and half the worst price during the panic of 2008.
All the bank shares have been put to the sword, wounded by administered rock-bottom interest rates, and given the coup de grace when they were barred from paying dividends this year. After all, if the company cannot pay out profits to its shareholders what is the point of owning the shares?
Have patience, says Gary Greenwood at Shore Capital. Everything has conspired against bank shareholders this year, but these things will pass. The shares stand at around half the value of the banks’ tangible assets, and they have more capital than they know what to do with. As he does not add, this has been such an annus horribilis that the banks might as well “kitchen sink” the numbers, and take as gloomy a view of loan losses as the rules allow.
The Bank of England has hinted that dividends will be allowed next year, but there is no sign that the market is paying attention. Shore guesses that Lloyds will pay out half its earnings next year, or 2p a share, for a 7 per cent yield. Of course, the risk of banks finding new ways of losing money is ever-present, as we saw with PPI. Negative interest rates would wipe out their margins and cause us to take our money and bury £20 notes in the garden.
All the bank shares are in similar travails. Lloyds has the advantage of a simple, domestic model, a market share that would not have been allowed in normal times, and scope to become much more efficient. Things can always get worse, but still…
Dig that crazy algorithm
Teachers want their pupils to do well, so they naturally take an optimistic view of their likely grades in external exams. Had teachers known beforehand that their predictions would become the actual qualifications, the temptation to indicate high grades might have become overwhelming. The scope for, ahem, encouragement to poorly-paid teachers from over-enthusiastic or wealthy parents would ensure an all-must-have-prizes approach. So to that extent, the wretched algorithm did serve a purpose, if not the one it was designed for.