Sudden stock plunges have become all too common since the global economy started to sour last year. Yet when Taylor Wimpey (TW.L), Britain's largest homebuilder by revenue, lost 42% -- or roughly $600 million -- of its market capitalization on July 2 after failing to secure a bridge loan, investors realized something was seriously wrong.
Now, Britain's other large homebuilders, Persimmon (PSN.L) and Barratt Developments (BDEV.L), are set to unveil quarterly financial results on July 8 and 10, respectively. Analysts don't expect the numbers to be pretty. After years of sizzling growth, Britain's bubbly housing market has fallen apart in the wake of the credit crunch. Sentiment is at a 15-year low, and mortgage approvals have plummeted 64% in the past year.
Britain's real estate downturn isn't as serious as the crisis in the U.S. But the problems facing homebuilders are the latest indication that weakness in the financial sector is finding its way into Britain's wider economy. Signs of trouble are rife: Inflation is rising, industrial production is down, and consumer confidence is at its lowest level since 1990. Countries well beyond Britain's borders would feel the effects if the world's fifth-largest economy fell into recession.
Slow-Motion Decline The sudden downturn among British homebuilders has caught many investors off guard. Since the early 1990s, the country's strong economic growth and low unemployment -- plus demand for housing that continually outstripped supply -- helped average home prices double. Shares of such builders as Barratt, Taylor Wimpey, and Persimmon soared in tandem. As late as last fall, it appeared that British property developers might be spared [BusinessWeek.com, 9/28/07] the calamity facing their American counterparts.
But a slow-motion reversal took hold as credit standards tightened and resales dried up. According to the British government's land registry, banks' reluctance to lend money has cut the number of home sales by 42% since the start of this year, while mortgage lender Nationwide says average prices already have fallen 6.3% over the same period. The Royal Institution of Chartered Surveyors [RICS] now predicts that Britain's housing market won't pick up until the second half of 2009, at the earliest.
Investors in homebuilders have fled in droves. Barratt's market capitalization has fallen 91% since the beginning of this year, and Taylor Wimpey's is down 84%. "The construction industry is in a really bad state," says David Stubbs, a senior economist for RICS in London. "It has basically run off a cliff."
As bad as that sounds, the situation remains worse in the U.S., where such builders as Lennar (LEN), KB Home (KBH), and Hovnanian Enterprises (HOV) have been slammed by the housing meltdown. According to the National Association of Home Builders, U.S. industry sentiment has fallen to its lowest level since 1985, and housing prices have dropped almost 20% over the past 18 months.
