Learning home truths

WHEN the doyens of Scotland's house building sector swap their hard hats for kilts and trews for their annual knees-up at the Scottish Home Awards in Edinburgh on Thursday, they'll have more than champagne and canapes on their minds.

After growing fat off the back of Britain's housing boom for well over a decade, house builders up and down the country are now starting to sit up and listen when economists warn of the credit crunch spreading from the financial markets to other parts of the economy.

The first cracks have begun to appear in the foundations of the industry as sector bodies warn that Britain's seemingly unstoppable housing market isn't nearly as solid as previously thought.

Boarded-up houses in Cleveland, Ohio, where one in 10 houses are now vacant as a result of the US sub-prime crisis, may seem a long way away from the many private housing developments in booming areas such as Edinburgh and oil-belt Aberdeenshire, but according to organisations such as the House Builders Association (HBA), the problems in the housing sector across the pond are fast gathering pace.

Roger Humber, strategic policy consultant at the HBA, warns: "It is tough times for everybody and the worst we have seen for 15 years."

The performance of leading house builders' shares on the London stock market mirrors the association's apprehension. Many took a nosedive last week, including Persimmon, which lost 3% of its value on Thursday, as mortgage lenders tightened their lending criteria and several banks withdrew mortgages to new customers due to a lack of funds. Barratt Homes' stock has lost 62% of its value over the past year.

The Co-operative Bank and First Direct were among the first to introduce a freeze on new customer mortgages, while a report released by the Bank of England on Wednesday suggested the bank's chairman Mervyn King and his adjuncts expect more could soon follow suit. There were 73,000 mortgage approvals in February according to BoE figures, only marginally more than the 72,000 recorded in December last year – the worst month on record since the mid-1990s.

Major players in the industry have started to admit that they're feeling the heat. Persimmon and Taylor Wimpey reported a drop in the number of houses sold last year, while Edinburgh-based Miller Group, the largest privately owned house builder and construction services firm in the UK, warned in January that full-year profits for 2007 will not top 2006's record haul, the first downturn in 13 years.

According to the HBA, the problems are poised to claim victims south of the border. A number of small and medium-sized house builders may soon be forced into a corner as they struggle to make interest payments on land bought at the height of the property boom which is now failing to produce the returns they had anticipated. Humber says: "If any of these companies have made unfortunate land purchases in the last year, and then have found sales dip, then it is highly likely they will be finding it difficult to keep up with interest payments."

Robin Carlyle, managing director of the online business advice service www.fightyourcorner.com, says he has noticed an increase in the number of house building companies, particularly small ones, seeking help in recent weeks. "We get calls from visitors to our website literally saying: 'I want to put my business into liquidation. Can you help?'"

Economists are quick to point out that the housing sector in Scotland differs from England and Wales, where prices are more prone to dramatic highs and lows. But as the evidence pointing to a housing slowdown mounts, questions are being asked about what is in store for the house building industry in Scotland.

Publicly, many house builders north of the border are putting a brave face on things. Although they are prepared to admit that the rate of growth in some parts of the market has been hit by the credit crunch, they argue that the continued shortage of family homes in Scotland means the industry remains in a strong position.

John Slater, group managing director of Stewart Milne Group's homes division, says that although homebuyers' confidence has been knocked by pessimistic forecasts from some commentators, the market is still driven by need in Scotland. "The Scottish market is far more robust and stable. There is a strong demand for homes, which is backed by need. By need I mean we're still getting married, divorced, having children. We've also had an influx of immigrants into the country and that sector of the market (family homes] is still very robust. We're also still seeing people upgrading their homes."

Jonathan Fair, chief executive of Homes for Scotland, the trade organisation for private house developers in Scotland, argues that the need for family homes is unlikely to disappear anytime soon. He is confident the house building industry will be able to tough out the change in conditions.

He says: "There has been a huge housing shortage in Scotland for many years and that won't change because the current financial condition is difficult. There is still a high demand for property across the board, with our members reporting a healthy footfall from customers."

Ken Ross, chairman and chief executive of the Elphinstone property group, is equally ebullient. "In Scotland we still have a shortage of homes for the needs and demands that exist," he says.

But behind closed doors, the picture doesn't seem quite so rosy. According to one leading house builder, who asked to remain anonymous, there are concerns in the industry about the recent change in lending conditions, particularly for first-time buyers. With some mortgage lenders now requiring as much as a 25% deposit from first-time buyers if they want to qualify for the best rates, and others closing their doors to them outright, there is a growing sense of unease among house builders who concentrate on city centre flats and smaller homes. Some have even sought meetings with the leading mortgage lenders about the situation, sources say.

One house builder warned: "Something needs to be done to address that. It is vital to the economy that this part of the market is actively supported."

Slater confirmed: "Yes, we are all talking to the major lenders about making sure we are practical and responsible in the way we lend to first-time buyers."

Homes for Scotland admits the first-time buyer market is a concern. Fair says: "Where the market has slowed is in relation to first-time buyers. While demand is still high, young couples are finding it is taking longer to secure access to funds and this will lead to a modest market adjustment."

This "market adjustment" could also cause problems further along the housing sector food chain, some property experts are warning. Last week the Royal Institute of Chartered Surveyors reported that workload growth among surveyors in the private housing sector delved into negative territory for the first time in nine years.

The credit crunch also claimed its first victim among Scotland's estate agencies last Monday when Edinburgh-based Stewart Saunders was forced into liquidation despite posting record sales of £65m in 2006. The company's liquidators, Tenon Recovery, signalled that the credit crunch had arrived on Scottish shores.

Tom MacLennan of Tenon Recovery said: "The closure of such a respected brand as Stewart Saunders is a clear indication that the housing market is in some difficulty."

Willie Hunter, managing partner of Hunters solicitors, a member of the Edinburgh Solicitors Property Centre, agreed that the market has taken a turn for the worse, and some estate agencies focusing on low-priced volume services could suffer. But he warned, nobody in the Scottish housing sector – estate agents, house builders or otherwise – should be panicking yet.

"If the market was still massively buoyant at the moment then Stewart Saunders wouldn't have gone under. It's going to be an interesting market, there's no question about it, but it's certainly not at the panic stage."