5th Oct 2018 12:33
LONDON (Alliance News) - Shore Capital Markets said it remains skeptical over the most recent Halifax house price index, retaining the view of the housebuilder market losing price momentum.
Data from the Lloyds bank subsidiary Halifax and IHS Markit showed on Friday that US house prices dropped unexpectedly in September.
House prices decreased 1.4% in September from August, confounding expectations for an increase of 0.2%. This was also much bigger than the 0.2% drop posted in August.
In three months to September, house price growth eased to 2.5% annually from 3.7% in three months to August.
On a quarterly basis, house prices gained 1.8% in July to September period.
Shore analyst Robin Hardy said that the data itself devalues the price index's credibility, comparing September's 1.4% fall over an annualised rate of 18% to the July reading which showed a rise of 1.2% or 15% annualised rate.
"This is now typical of the Halifax price index with high volatility and strong gyrations. This, we feel, devalues this index’s credibility," Hardy said.
"In August, this index suggested that annual inflation was 3.7% and accelerating when all other indices indicated that the market was losing price momentum. Nationwide suggests a passing rate of 2% but in its commentary, it stressed for the third month is a row that it was sure that the rate of inflation is set to drop to 1% as the passing rate by the end of the year."
"Our view is aligned with Nationwide's (not as low, however) and we see a passing rate by the end of December of 1-2% before dropping to 0% for 2019," Hardy added.
The news stands as a problem for housebuilders as it means that construction cost inflation can no longer be recovered, particularly with most house builders reporting already rising costs at 3-4% and the rate beginning to creep up.
So far, Shore has identified MJ Gleeson as having the highest rate, were costs have risen to 4.5% to 5.0%.
"This level of cost inflation requires around 2.5% house price inflation in order to hold margins steady. If inflation is zero in 2019 and costs are up 5%, margins across the sector could take a 200-250 basis points hit. In a slower market, it is likely that selling costs will also have to rise adding to the potential margin hit," Hardy said.
Shore said that with the increasing unlikeness that companies can continue earnings growth, the risk of shock has been introduced on two fronts.
First is that at some points followers of the sector will start to take a more cautious stance on forecasts and target prices. Secondly, companies will need to realign expectations and prospects from 2019 onwards, which could be seen by investors as profit warnings.
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