Falling prices means less new builds

Gorgeous_George

Many of us look forward to house prices falling to more affordable levels. However, there may be a sting in the tail.

House builders own lots of land that either has planning permission or could probably get planning permission. If prices fall significantly, the large house builders will probably lay off many workers and hold on for prices to rise again. This would maximise their profits in the long term and that is what all businesses plan to do.

So, we may well have lower prices but the biggest effect will be less houses available - affordable or not. Can Gordie solve this problem as well?

Another thing I heard yesterday that I was not aware of is VAT. Apparently, build a house on green belt or new building land and there is no VAT to pay. Build on a brown field site and VAT is payable. Can any experts out there confirm whether this is true?



GG

kennyboy66_2

Gorgeous_George wrote: »

Another thing I heard yesterday that I was not aware of is VAT. Apparently, build a house on green belt or new building land and there is no VAT to pay. Build on a brown field site and VAT is payable. Can any experts out there confirm whether this is true?

GG

Not quite. New builds anywhere are zero rated. It is refurbishment or renovation that is standard rated.

epz_2

in theory it sounds like a good idea, in practice they would have a business with massive amounts of assets and possibly debt to service said assets and very low cashflow.

it tacks serious balls to tell share holders that the management team which has been put in place to run a large building concern want to keep being paid their high salaries to basicly just sit in the office for 5-10 years till the market picks up as some type of investment holding.

i can see them concentrating on higher margin projects that may have used more resorces in the short term but i seriously doubt any organisation which has accumulated substantial amounts of land is going to be in any position to wait at least 10 years to get the prices back up to current levels.

remember they still make a 50% margin so if prices drop 30% then they can make 20% proffit now or 50% in a decade deducting 6%+ potential interest, possibility of market changing and govenment compulsory purchasing it for council houses etc.

think about an of examples

A company has assets of 100million in land and debt of 40million to the bank etc, land prices drop 30% an the bank are now still owed 40million but the asset value of the company is now 70mill and they dont plan on getting any cash flow to service the debt for a decade.

having just seen their exposure jump from 40% of the business assets to 57% and are bricking it about more drops couples with lots its own customers going bankrupt due to negative equity etc what do you think the bank will say when the company asks if they can just roll the interest payments into the debt for 10 years.

Gorgeous_George

epz wrote: »

remember they still make a 50% margin so if prices drop 30% then they can make 20% proffit now or 50% in a decade deducting 6%+ potential interest, possibility of market changing and govenment compulsory purchasing it for council houses etc.

Surely a 50% profit margin means a house costs £100K to build and sells for £150K.

If prices fall 30% the house now sells for £105K. Assuming it still costs £100K to build (and wages do increase even in a property slump), then their new profit is just 5%. Maybe better to wait.

I'm not suggesting that housebuilders will stop altogether but they wouldn't have any great urgency to work 24/7.



GG

epz_2

Gorgeous_George wrote: »

Surely a 50% profit margin means a house costs £100K to build and sells for £150K.

If prices fall 30% the house now sells for £105K. Assuming it still costs £100K to build (and wages do increase even in a property slump), then their new profit is just 5%. Maybe better to wait.

I'm not suggesting that housebuilders will stop altogether but they wouldn't have any great urgency to work 24/7.



GG

my bad, i was thinking it was 50% of sale price was profit, ie 100k house drops to 70k they would still be making 20k.

that said ive worked in industries which sold stuff at a loss just to keep the factory churning over, supplier relations, workforce skill sets etc. 5% profit over the say 6 month it takes to build a place is still a reasonable return if the alternative is to sack people (redundancy cash) sell off plant cheaply and lose vital planning and trade contacts.

my guess is there will be a long stagnation in prices after any crash like the early 90s, in that sort of situation with the government still wanting council houses they could easily keep the turnover up.