Housing minister Barwell's policy changes cast doubts over housebuilder profits

Housing minister Gavin Barwell has given a strong indication of a material shifting in housing policy, hinting that controversial Starter Homes scheme will be scrapped and the government will pursue policies to expand the public sector and private sector rental markets.

Speaking at the British Property Federation's RESI conference, Barwell showed there will be a softened stance on home ownership under new prime minister Theresa May's government, stressing that the intention was “to make sure we have a good, thriving private rented sector”.

Barwell, who was appointed in July, said: “We need to build more homes of every single type and not focus on one single tenure.”

He added: “Recent growth in the bespoke rental market has been impressive, but this progress must be expanded.”

There was also strong hint about the scrapping of the Starter Homes initiative, which requires housebuilders to offer 200,000 new homes to first time buyers under 40 at prices at 20% below market value, with the discount funded by the removal of the requirement to build around 20% of every site for social and/or affordable ownership.

The previous administration's hope that strong demand for homes would stimulate larger housebuilding companies to increase annual output from the current 140,000 to at least 200,000 has fallen on stony ground.

Analyst Robin Hardy at Shore Capital, who pointed out that housebuilders instead used the various government stimulus measures to create a golden trading environment with substantial benefits for margins, returns, cash flow and dividends, said the new policy direction was likely alter the dynamics of the sector's profitability.

"We have long been concerned that policy would be changed to more aggressively drive up supply and in so doing create greater competition for land and construction resources which would have the inevitable effect of making the trading environment for the large house builders less golden and rein back what we have long believed to be super-normal trading conditions and profits. In our view, the lack of competition in this cycle has been the major driver of the sector’s fortunes," Hardy said.

"In creating a focus on institutionally funded private rental sector output (PRS), re-starting direct investment in housing by the state and looking for mechanisms to re-vitalise the SME house builders, we are likely to see a change in the dynamics of the house builders’ profitability especially if there is any adjustment to the scope and scale of Help-to-Buy, the affordability underpinning mechanism on which the house builders have been increasingly reliant/dependent."

Hardy said he remained cautious on companies in the sector but in most cases said individual stocks were fully valued rather than over-valued.

"But as there is still significant positive momentum the risk still remains that the sector becomes over-bought and we do have an elevated risk that our stance on the sector may have to move more towards negative than neutral."