LONDON Britain's housebuilders face a dose of harsh economic reality next year as government steps to kickstart sales falter and strategies to bolster their balance sheets run out of steam.
Housebuilders have enjoyed stable sales for 18 months as the government put housing centre-stage in its battle to spark economic growth, with plans like NewBuy and Funding for Lending, and any slump would hit these wider ambitions.
Building on cheap land bought in the aftermath of the 2008 housing crash - combined with a focus on bigger homes and on projects in the more affluent south of England - have also bolstered results in the sector in the last 18 months.
That performance has been reflected in shares of Taylor Wimpey and Barratt, two of Britain's biggest housebuilders, up about 56 and 100 percent respectively in 2012.
But government initiatives are failing to significantly free up mortgage lending, which means sales growth could tail off and share prices fall, some housing experts said.
"How long will the government keep throwing money at what it thinks is the blue touch paper for economic growth?" said Robin Hardy, an analyst at brokerage Peel Hunt, citing broadly flat sales announced by housebuilders this week.
Britain's economy moved out of recession in the third quarter, but concerns linger over its reliance on the weak euro zone for trade. Falling construction output, of which housebuilding is part, has been the main drag on growth this year.
Mortgage lending in the third quarter was 5 percent below the same period in 2011, the Council of Mortgage Lenders said, indicating more caution among lenders despite the fact NewBuy and Funding for Lending were both launched in 2012.
NewBuy was unveiled in March under plans to spark 100,000 home sales by 2015 by making it possible to buy with a deposit of 5 percent. Given borrowing rates under the scheme are high at between 4.5 and 5.5 percent, 25,000 is a more realistic number, the Home Builders Federation said.
It all makes share prices look expensive.
Eighteen months ago, housebuilders traded at a 30 percent discount to net asset value (NAV), a key valuation measure, said analyst Rachael Applegate at brokerage Panmure Gordon. They now largely trade in line with NAV, denoting an unwarranted level of optimism, she said.
Taylor Wimpey for instance trades on a price to book value of 1.01 and Persimmon trades at 1.21, according to Thomson Reuters data.
"During next year's spring selling season they may be able to match 2011 figures, but not improve on them," Applegate said, arguing weak consumer confidence and tight lending conditions could help push share prices down 10 percent in coming months.
"Housebuilder share prices used to be incredibly tuned into the euro zone crisis, but they have gone nuts," Hardy said. "There is a phoney environment as everyone has the blinkers on to the risks."
Roger Humber, strategic policy advisor to the House Builders Association, said: "This week Bovis Homes said it is selling 0.46 homes per site per week but in a decent market the figure is 0.75.
"Despite every conceivable form of government assistance, the figures are just about adequate rather than good," Humber said, calling the share price performances "baffling".
None of the housebuilding chief executives contacted by Reuters would comment on their company's share price, though all welcomed the government initiatives.
Persimmon Plc's Mike Farley and Barratt's Mark Clare said the Funding for Lending scheme announced in July, designed to boost mortgage issuance, would help but hadn't kicked in yet.
"Banks have forgotten how to lend and lenders need to drop rates to get the industry moving again," said Redrow Plc Chairman Steve Morgan. Taylor Wimpey declined to comment and Bovis Homes was unavailable for comment.
Outside the top 10 largest housebuilders, the position is "absolutely dire", said Humber, as smaller builders struggle to access debt and suffer more than bigger rivals from costs associated with a growing list of building regulations and the country's planning system.
It makes a government target of 240,000 new homes every year by 2016 to meet population needs unrealistic, he said. The total was 110,000 last year.
Major housebuilders bought land cheaply after the housing crash and while building on it flatters profit margins, this land will run out in two to three years, said Kevin Cammack, a housebuilding analyst at Cenkos Securities, describing the tactic of using cheaper land as one of "instant gratification".
Their strategy of concentrating on the south of England was only viable in the short-term because, as national housebuilders, they couldn't turn their backs on the regions for long, he said.
They can also only build a limited number of pricier family houses, Cammack said. "You can't keep trading up the pyramid into a smaller and smaller market."
Peel Hunt's Hardy said housebuilders' long-term bet is that house price inflation will return to rescue them, in similar fashion to previous housing cycles.
"Inflation is craved as the easy way out rather than becoming better businesses by cutting construction costs or using new building methods," Hardy said. "The business model is exactly the same as it was after World War Two."
(Additional reporting by Natalie Huet; Editing by David Holmes)