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Interest rate rise likely this year
Comments
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Leading housebuilders shares down around 4% this morning as the market assumes fewer houses will be built.
The market ought to visit this forum to reassure itself. In our alternate world builders make more money hoarding land than by building houses so a reduction in building would be really great for them.0 -
They can make more money hoarding land. Depends on how many houses they can sell and at what price at any particular time. mot exactly rocket science.The market ought to visit this forum to reassure itself. In our alternate world builders make more money hoarding land than by building house so a reduction in building would be really great for them.0 -
They can make more money hoarding land. Depends on how many houses they can sell and at what price at any particular time. mot exactly rocket science.
The market doesn't seem to agree with you.
If they can make more money by hoarding land then surely not having to waste good hoardable land by building on it would be better for profitability.0 -
They maximise profits from the land by managing how many properties they build. I.e. a rising market allows more houses to be built. Their shares have fallen because the market is expecting them to reduce building due to the interest rate increase. House prices can and more than likely will continue to rise as supply will be constrained. If building continued at a set rate regardless then it would cause cooling to be a bit more extreme or even cause falls in price which is unwanted for builders. Maximising gains from the finite resources means controlling supply.0
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The market doesn't seem to agree with you.
If they can make more money by hoarding land then surely not having to waste good hoardable land by building on it would be better for profitability.
It really is very simple.
If a builder owns a piece of land and they can build a house on it which will sell for say £200,000 this year, but they have projected that the same house will see for £400,000 in two years time. Not building now is the most profitable option.
This assumes the cost of keeping the land empty is not much.0 -
The market doesn't seem to agree with you.
If they can make more money by hoarding land then surely not having to waste good hoardable land by building on it would be better for profitability.
Hoarding land is profitable because what you can do with it increases in value with time. Anything that might decrease the amount people can spend on housing would make a business strategy based on hoarding buildable land less profitable.
It doesn't mean that is the builders strategy but the markets response is exactly what I'd expect it to be if it was. Try and keep up
Having a signature removed for mentioning the removal of a previous signature. Blackwhite bellyfeel double plus good...0 -
It really is very simple.
If a builder owns a piece of land and they can build a house on it which will sell for say £200,000 this year, but they have projected that the same house will see for £400,000 in two years time. Not building now is the most profitable option.
This assumes the cost of keeping the land empty is not much.
It doesn't work like that.
Capital intensive companies like builders are assessed on a metric called 'Return on Capital Employed' (ROCE). The reason for that is capital is the main input into the business. ROCE is calculated as net profit divided by capital used by the company.
Every building plot that remains unsold is capital employed but not turning a profit. Even worse is a plot with a house on it that remains unsold as that's even more capital tied up.
If you want an example, check out BDEV's annual report:
http://www.fundslibrary.co.uk/FundsLibrary.DataRetrieval/Documents.aspx?type=sl.ra.full&docid=0af2281d-13df-4e66-91cc-ade9e108fd6d&user=hl_website_documents
The balancing act they face is holding enough land to be able to have houses to sell in a couple of year's time but to hold so much that ROCE is pushed down. BDEV holds a little over 4 years of supply in its land bank. It reckons to take an average of 70 weeks just to get planning permission hence the need to hold so much land.
Owners of volume builders (shareholders) aren't interested in the CEO hanging on to plots to sell houses on in a year or 2. If investors wanted to bet on rising house prices they'd buy some houses. They want to buy into a builder and they want them to build and sell homes, not to speculate on future prices.0 -
It doesn't work like that.
Capital intensive companies like builders are assessed on a metric called 'Return on Capital Employed' (ROCE). The reason for that is capital is the main input into the business. ROCE is calculated as net profit divided by capital used by the company.
Every building plot that remains unsold is capital employed but not turning a profit. Even worse is a plot with a house on it that remains unsold as that's even more capital tied up.
If you want an example, check out BDEV's annual report:
http://www.fundslibrary.co.uk/FundsLibrary.DataRetrieval/Documents.aspx?type=sl.ra.full&docid=0af2281d-13df-4e66-91cc-ade9e108fd6d&user=hl_website_documents
The balancing act they face is holding enough land to be able to have houses to sell in a couple of year's time but to hold so much that ROCE is pushed down. BDEV holds a little over 4 years of supply in its land bank. It reckons to take an average of 70 weeks just to get planning permission hence the need to hold so much land.
Owners of volume builders (shareholders) aren't interested in the CEO hanging on to plots to sell houses on in a year or 2. If investors wanted to bet on rising house prices they'd buy some houses. They want to buy into a builder and they want them to build and sell homes, not to speculate on future prices.
So in some cases it is better to hoard the land than to build on it.0 -
More restrict building than hoard.0
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