It’s party time for builders as the house price bubble keeps inflating

Taylor Wimpey turned a loss last year into a thumping profit. Despite the industry’s propensity for scandal, there’s a good chance of more to come, writes James Moore

Housebuilding giant Taylor Wimpey has raised its full-year earnings outlook after swinging to a first-half profit amid Britain’s booming property market (PA Media)

The City’s money men and women are a funny lot. Worshippers at the altar of untrammelled capitalism, who end their prayers with a resounding chorus of “Ah, Money”, they have a strange habit of missing out on companies that look like sure things.

Take Taylor Wimpey. The shares embarked upon an extended slide in the middle of April, one that had turned into something resembling a Tom Daley-style dive by last month, only for the company to report results that led it straight to the top of the FTSE 100 leaderboard shortly after turning up on dealers’ screens.

Yes, yes, the stamp duty holiday is coming to an end, and there’s the cost of putting the cladding scandal right, and if the Competition and Markets Authority doesn’t come down on the company and its peers like a ton of bricks over the leasehold scandal that’s seen buyers landed with usurious ground-rent escalators, well, it might as well just shut up shop. Given the cross letters the watchdog has been sending out of late, including ordering an end to those escalators, I don’t think it means to do that.

But even with all of those sometimes self-created problems to contend with, this company, which turned last year’s first-half operating loss into a £420m profit this time around, is riding the sort of wave that would make an Olympic surfer think “Come to papa”.

House prices continue to head northwards because there’s an insufficient supply and heavy demand. Cheap mortgages aren’t too hard to find, and the government is subsidising a bunch of them until 2023 (see below), albeit with some conditions attached.

Here are a few more salient points specific to Taylor: just over 19 per cent of the purchase price of every new home the builder sells is pure profit, and it thinks it can push this higher. The builder has been buying up land faster than shoppers who’ve been paying attention to the stories about shortages have been pushing loo roll through the checkouts. It built a record number of houses in the first half of the year, and has upgraded its earnings targets. Companies don’t do that unless they’re pretty sure they can hit and exceed them. The full-year figure is now expected to hit £820m, maybe more.

Those are just a few of the shares’ more obvious attractions. There are more besides.

The sun is shining brightly on the housebuilding industry, and the phrase “you’ve never had it so good” comes to mind for its investors. Perhaps they just fear the current housing bubble is about to pop.

If that’s it, CEO Pete Redfern sought to ease their minds by taking to the BBC to tell the world that it’s not going to happen because lenders aren’t as lax as they used to be in the days when it seemed anyone could rock up and get a mortgage with just a couple of payslips and proof of address – among other differences with 2007, which was the last time the market went into a real tailspin.

What they probably don’t have to worry too much about is people looking at those bumper earnings, and those margins, and using the word “excessive” in connection with them before talking about plans to bring a little temperance to the profit party.

They should, because even though Redfern has been saying that the replacement Help to Buy scheme only accounted for 27 per cent of sales, down from more than half a year ago, Rishi Sunak’s creation is still pouring petrol on a house-price bonfire that was crackling away quite nicely without it.

The scheme, which offers lenders guarantees to incentivise them to offer more 95 per cent home loans, looks like a builder’s subsidy to these eyes, just as the evidence shows its progenitors were. It’s contributing to windfalls for the likes of Taylor Wimpey. There have been times when windfalls have been taxed. I very much doubt this will prove to be one of those times, but perhaps it should be.

Sure, Taylor Wimpey and its chums aren’t without what they like to refer to in the square mile as “downside risks”. Some of them could come from unexpected places – perhaps the skilled labour shortages we’re going to be talking more and more about as the economy recovers. It’s hard to build houses if you can’t lay your hands on brickies, sparkies and chippies. The City being the City, you can never quite discount another financial crisis, either.

But the company would otherwise seem to be set fair. The more myopic parts of London’s investment community mightn’t have worked that out yet, but they soon will.