The severe drop in approved mortgages are being blamed for UK homebuilding giant Persimmon’s report that it will halt work on new sites until the market improves. Recent reports indicate that the number of approved mortgages has plumetted to 50 per cent of what it was last March. Significant tightening within the mortgage market has caused house sales to drop by nearly a quarter in the first four months of 2007, according to information released by Persimmon, the UK’s largest housebuilder. The company reports that while the past three weeks should be the strongest of the year, rates of sales had fallen even further.
 
“As a result an increase in discounting, marketing costs and incentives are being utilised in the market to compete for the reduced level of demand and this is having a negative impact on margins,” said Mike Farley, Persimmon group chief executive, in the company’s AGM statement on 24th April. “Whilst we continue to focus on achieving the best possible selling price in every location it is likely that, with the continuation of current conditions, the market will become more challenging.”
 
The statement indicates that total sales revenue for 2008 is currently c. £1.37 billion, compared to figures in 2007 of c. £1.80 Billion. Consequently, the company said in its statement that it will hold off on working on new sites until there is a visible increase in mortgages. Just days after the released AGM statement, however, national reports indicate that the company will also halt expansion on new sites all together. Persimmon’s chairman John White suggests that conditions today may be the worst the UK has seen since the early 90s.

“Because of the uncertainties of the global economy and the UK lending environment it is difficult to predict when the market will improve,” continued Farley’s statement. “We are therefore focusing on management of cash flows within the business to ensure that our balance sheet strength is maintained… Against the current backdrop we have postponed the commencement of scheduled new sites until the mortgage market improves.  At the end of March, our borrowings were £1.03 billion.  Our committed facilities which have an average term to maturity of over 3 years provides comfortable headroom
for our seasonal peak debt requirements in April.”

Most national reports this week indicate that mortgage conditions are not improving, despite recent attempts by the Bank of England to improve liquidity. While Persimmon’s statement suggested illiminating stamp duty for first-time home-buyers for purchases under £250,000 for at least a year, major investment managers and firms have indicated little faith in long-term improvement, regardless of the methods suggested by such experts. Recent reports also suggest that the majority of potential buyers are avoiding investment or purchase out of fear of the worsening financial conditions. Worse a fate, they are reportedly conserned about job loss.

This is desparaging for companies like Persimmon’s and its builders, especially in the wake of reports that jobless benefit claims are at their lowest level compared with figures from the past three decades. Congruently, compared with the previous housing recesion, unemployment rates are 50 per cent lower, and, as a derivitive of disposable incomes in the UK, mortgage payments are considered to be more affordable than they were in the last housing recession.

“At some stage, in our view, housing market activity will improve given the underlying requirement for more housing and a ‘place to live’ in the UK,” said Farley. “Given our strong financial position and scale we remain confident in the medium and long term prospects for Persimmon.”