Wrecked: Housebuilders hit out at banks for sending industry spiralling into crisis

SCOTLAND’S housebuilders have hit out at Britain’s banks for tipping their industry into crisis and are pleading for government help to rescue them from a downturn that is expected to spark over 10,000 industry job losses in the current year.

Jonathan Fair, chief executive of housebuilders’ lobby group Homes For Scotland, accuses banks and building societies of precipitating a crisis for the sector which will cause the SNP government to miss its target of boosting new home construction to 35,000-a-year by 2015.

Fair said: “The banks are taking a very myopic view. The mortgage drought that they have created is jeopardising some of the very businesses that they have lent to on the corporate side. The banks have become far too conservative in their approach to risk, taking a narrow view of their own interests without thinking about the consequences of their actions for companies, employment and the wider economy. If current trends continue, it’s inevitable that some of our member companies will face severe difficulties.”

Volume housebuilders employ 52,500 people in Scotland, but Fair predicts that between 10% and 20% fewer homes will be built in the current year. Amid widespread reports of layoffs among volume housebuilders, industry sources have estimated job losses in Scotland alone at around 10,500, with work on building sites in many locations grinding to a halt.

Many housebuilders took on massive debts to fund acquisitions of land and rival companies at the peak of the credit bubble. However, since the credit crisis kicked in in July/August 2007, they have faced the double whammy of higher-priced debt and the banks’ growing reluctance to provide affordable mortgages to their end consumers.

Since last summer, banks have been demanding higher deposits from mortgage borrowers, as well as rationing their loans. In Scotland the number of new mortgages slumped 20% to 16,000 in the first quarter of 2008, compared to the 40% fall seen in the UK, according to the Council of Mortgage Lenders.

Fair is demanding that the Scottish government, Westminster government and Bank of England step in to avert catastrophe. He is urging them to put pressure on lenders to amend their behaviour so it becomes easier for first-time buyers and key workers to obtain mortgages. “They can also introduce measures to improve the lot of first-time buyers and key workers, for example a temporary suspension of stamp duty,” said Fair.

He believes the £50 billion swap deal announced by the Bank of England in April — which permits banks to exchange mortgage securities for gilt-edged securities — is insufficient. “There’s still an estimated £30bn shortfall between demand for new mortgages and available funding.”

Ken Ross, chairman and chief executive of Elphinstone Group, said: “In view of the problems facing first-time buyers and key workers, I would call on the Treasury to adjust stamp duty and to provide additional tax reliefs.”

Fair warned the current mortgage drought is slowing housebuilding activity to the extent there will be “severe supply shortages 12 months’ time”.

The Scottish government last November set a target of increasing the number of new homes built each year in Scotland to 35,000 by 2015, up from about 25,000. However, Homes For Scotland maintains Scotland’s housing market is holding up better than that south of the Border.

“We don’t have a high level of unemployment. We have never suffered the same levels of house-price inflation, affordability is more palatable and we have a more secure mixture of tenures, which makes us less sensitive to credit market problems than the rest of the UK,” Ross said.

“Scotland does not have the same issues of boom and bust as the English market,” said Ross. “It is not a given that property prices are going to fall by 20-25%. However there are issues on the demand side, including a lack of confidence, a lack of certainty and a perceived lack of finance.”

Alastair Stewart, construction analyst at Dresdner Kleinwort Wasserstein, said: “Basically, Scotland seems to be holding up better than most of England. However, it’s impossible to tell how long that will last.”

Share prices in quoted housebuilders last week slumped by 20% (bringing cumulative falls of between 60% and 95% for the past 12 months) on investor fears some may be forced to write down the value of their land, perform discounted rights issues and swap debt for equity to cope with the deepening housing slump.

Worst hit was Barratt Developments which rushed out a statement denying it would breach banking covenants. Stewart warned investors against buying Barratt shares “at any price” because they have “no means of visible support”.

Barratt acquired rival group Wilson Bowden at the peak of the market in April 2007 for £2.2 billion. The combined group had net debts of £1.7bn as at December 31, more than six times its current market value of £270 million.

Merrill Lynch last week downgraded Barratt alongside five other UK housebuilders: Bellway, Berkeley, Galliford Try, Persimmon and Redrow.

Merrills’ analyst Mark Hake said: “There is growing evidence of consumers now behaving in a manner similar to that seen in the early 1990s, in that concerns over job security and falling house prices are leading to reluctance to make a house purchase.”

Most large Scottish-based housebuilding groups including Gladedale, Miller Group and Stewart Milne were unavailable for comment.

This article was the business lead in the Sunday Herald on 15 June 2008. .