The crisis swallowing Britain’s housing hopes

When Sir Keir Starmer swept into power in 2024, Britain’s biggest housebuilders were brimming with optimism.

Bolstered by Labour’s promise to get Britain building again – underpinned by a manifesto pledge to build 1.5 million homes – bosses heralded a “fresh start” for their beleaguered sector.

Just two years later, however, Sir Keir is on the way out and that optimism has all but vanished. The industry has been bludgeoned by tax rises, surging build costs, hesitant buyers and political uncertainty – and the vultures are circling.

Housebuilders’ shares are plummeting to their lowest levels in a decade and profit forecasts have been cut. It is perhaps little wonder, then, that hedge funds are upping their bets against the sector.

British builders now account for seven of Europe’s 10 most shorted housebuilders, according to data from Breakout Point shared with The Telegraph.

Among these, Vistry is now the most heavily shorted by some distance. More than 15pc of its shares are on loan to investors betting on further declines – almost double the level of the next most targeted company, Crest Nicholson.

Shortsellers aim to make money by betting that share prices will fall and a large number of wages against a stock suggest a growing part of the market believes it will struggle.

For a sector that spent much of the last decade as a star performer on the stock exchange, it is an uncomfortable position to be in.

Charlie Campbell, an analyst at Stifel, says Britain’s housebuilding sector is in its worst state since he started covering it in 1997, surpassing the global financial crisis of 2008.

While that economic shock led to housing demand halving overnight, he says the market readjusted in relatively short order thanks to a “very quick” drop in interest rates and reset in house prices.

This time, however, three successive inflation shocks triggered by the pandemic, the Ukraine war and the Iran conflict have led to “persistent inflation” and high mortgage rates, he says.

Mortgage approvals fell to 56,200 in May, according to Bank of England data, marking the lowest level since December 2023 and below a six-month average of 63,300.

Although housebuilders have smaller debt piles than they did in 2008, house prices have stagnated and the companies are enduring a prolonged squeeze on costs – with no respite in sight.

“It is pretty gloomy,” says Campbell. “With the way that demand is at the moment, the Government isn’t going to hit that 1.5 million target.”

The housebuilders themselves play down the crisis. Graham Prothero, the chief executive of MJ Gleeson, says the industry is “a million miles from the global financial crisis”.

“This is a difficult market, but it is absolutely not a dead market,” he says. “Back then there were no buyers and housebuilders were carrying too much debt.”

Nevertheless, the banks are on high alert, with lenders to both Crest Nicholson and construction group Henry Boot reportedly drafting in advisers amid concerns over potential breaches of loan covenants.

Investors are also taking action. Barratt Redrow’s biggest shareholders are demanding that its board buys back as much as £1bn of shares a year amid fears the company has become a takeover target.

Plummeting profit margins

Anthony Codling , of RBC Capital Markets, notes that house prices are stable – up 3.8pc annually to £270,000 in the year ending April – but that the market is still “tough” for housebuilders.

“Stagnant house prices coupled with rising build costs have hit returns hard, profit margins are falling, and this is causing some to breach banking covenants, typically interest cover,” he says.

According to Codling, investors are sending mixed messages. Some think the builders need to raise equity to shore up balance sheets, which could lead to share price falls. Others argue that the stocks have become too much of a bargain and are calling for buybacks to increase the value of shares available to buy.

“The pressures we see today are very different from previous slumps, but the playbook remains the same: focus on cash and prepare for the good times,” he says.

“This time, the good times will come when the land market resets, because build and regulatory costs have risen, land prices need to fall so that housebuilders can once again make normal returns.”

For housebuilders, however, the good times seem a long way off. Both Berkeley Group and Taylor Wimpey have cut their profit forecasts. Berkeley has also stopped hiring new staff and scrapped land purchases for housing projects to counter weak demand.

Aynsley Lammin, an analyst at Investec, says profit downgrades of around 20pc are already baked into forecasts.

Vistry, which has offered voluntary redundancies and aggressively discounted homes for sale to produce cash, this week warned of a £30m pre-tax loss for the first half of the year while announcing the abrupt departure of its finance chief.

Adam Daniels, the housebuilder’s recently promoted chief executive, is carrying out a review of the business and his team spent Wednesday morning reassuring analysts that it remains comfortably within its banking covenants.

But the housebuilder, which has been described as “Labour’s favourite”, faces an added challenge because it operates a partnerships model focused on building affordable homes with housing associations, local authorities and build-to-rent investors.

Labour has unveiled its flagship £39bn, decade-long programme for building affordable homes. But the scheme has been beset by delays and cuts to targets and there are growing concerns about when funding will be made available.

“The cash from the £39bn Social and Affordable Homes Programme is not hitting the ground as fast as anybody would like,” says Prothero.

“That’s a challenge for the whole industry and particularly for partnership-focused builders. If we can improve viability and create greater certainty, the industry is capable of building significantly more homes.”

As the man tipped to take charge of the country, Andy Burnham holds the key to whether things get better or worse for Britain’s housebuilders.

Several analysts pointed to the uncertainty hanging over possible taxes such as a land value tax, which Burnham previously endorsed as an annual charge to replace stamp duty and council tax.

“If he delays it all and holds a review, then the whole sector freezes again because nobody does anything until they know what’s going to happen,” says Codling.

‘Nowhere left to tax’

The Home Builders Federation (HBF) estimates that housing delivery has flatlined at around 200,000 a year – well under the average of 300,000 a year that ministers are aiming for.

Steve Turner, an executive director at the HBF, blames the crisis on years of ballooning costs.

“Housebuilders are under huge pressure,” he says. “Over the past 10 to 15 years there has been a layering of costs that has meant many sites are no longer viable.

“Affordable housing is now largely funded through the sale of private homes, which is effectively a tax on housebuilding.”

Add infrastructure levies, increases to landfill tax, the Building Safety Levy and net-zero requirements, and “you reach a point where there is ultimately nowhere left to tax”, says Turner.

He says this has resulted in smaller builders leaving the industry altogether, because the “complexity, bureaucracy and lack of viability have become overwhelming”.

Turner adds: “When this Government came in, there was a lot of positivity from the industry, but there is growing frustration because not all of the planning changes they talked about in opposition have come through yet, and nothing has been done on incentivising buyer demand or the cost pressures facing builders.

“The Government has to create a policy environment that allows companies to build. You cannot keep increasing taxes and policy costs and still expect housing supply to rise.”

Until mortgage affordability improves, regulation eases or government support arrives, the sector is being forced to balance cash preservation with growth, shareholder returns with building new homes, and survival with rising taxes and political uncertainty.

“Volumes are subdued while buyers remain cautious and we wait for the changes to the planning system to come through and the large social and affordable housing budgets to be deployed,” says Codling.

“Housebuilders are walking a tightrope, deciding whether to run divisions at below-par volumes and make lower profits or shut them down to bolster returns.”

But Codling warns that closing down divisions is “akin to cutting out muscle” and hampering recovery. “The challenge is to cut costs enough, but not too much,” he adds.

It is a delicate balancing act that the short sellers have already clocked. For Britain’s builders, while the walls are not collapsing yet, they are certainly closing in.

A Vistry spokesman said: “It’s no secret that it [housebuilding industry] is facing challenges.

“However, we delivered 6,100 much-needed homes in the first half of the year, over half of which were for affordable housing ... It is vital that the industry receives support so that it can build momentum, with a focus of accelerated delivery across all tenures, particularly affordable.”