Special Feature
There’s no guarantee that the same fate won’t befall the “funding for lending” scheme. But the scheme has received a much better press than earlier wheezes. Briefly, the scheme offers cheap funding to banks from the government, but only on condition that the money is lent on to small businesses and individuals. It has the potential to inject around £80 billion of lending into the economy. Some of this new money will go to into mortgage lending which will benefit house-builders. That’s the theory anyway. And that, I believe, is why house-building shares have taken off in tight formation. So will the latest scheme trigger a new housing boom? That’s a bit of a stretch of the imagination given today’s economic woes. And yet… it isn’t generally known that the biggest housing boom in our history occurred in the 1930s, a period most of us associate with the Great Depression - and is thus not so different from the current economic environment. After the Great War of 1914-18, the government realised that something had to be done about housing. Our housing stock was old and dilapidated, there were widespread slums and most people lived in poor quality shared rented accommodation. During the 1920s, the preferred policy was for the government to channel funds to local authorities to build rented housing. The target was to build 500,000 houses. By the end of the 1920s it was apparent that the government was falling far short of its targets, stymied largely by high interest rates. But in the 1930s, there were two game-changers. First, in 1931, Britain came off the gold standard. This led to a rapid fall in interest rates. Second, this was the golden era for building societies; many of whom saw themselves as being in the vanguard of a moral crusade to improve the lot of the working classes. Between 1935 and 1938, private enterprise housing production, financed by the building societies, had soared to around 270,000 units a year, far exceeding the 100,000 then being built by local authorities.
28 www.financial-spread-betting.com | July 2012
By way of comparison, according to figures from the NHBC, the pre-recession high in 2007 was 200,700 homes registered with NHBC (with a far higher UK population now than in the 1930s). Last year, the figure was just 115,020. There is one key similarity between the 1930s and now: interest rates were low in both periods. The key difference is that in the 1930s building societies were keen to lend. Today, the bigger building societies have converted to banks, and some, such as Northern Rock, Bradford & Bingley and HBOS, have failed. And trying to get a mortgage out of a bank is like getting blood out of the proverbial stone. But the demand for new houses would still be strong, if only buyers could get mortgages. Maybe it will get a bit easier now. Interest rates are low. And a new generation of “challenger banks” is springing up, such as Metro Bank, Virgin Money and banks operated by Asda, Sainsbury’s, Tesco, M&S and the Co-operative, not to mention credit unions; their growth driven by dissatisfaction with the big banks. Early days yet but who knows where that might lead? So the seeds for renewed prosperity of the house-building sector have been sown. It may well be that a sprinkling of nutritious “funding for lending” will be enough to trigger the germination of these seeds. Which is why I feel that, even though they’re not that sexy, you should include a quality house-building share in a diversified portfolio of equity trades. I’ve looked in some detail to see if any particular share stands out. Unfortunately, there’s no stand-out share not surprising, given that these companies have a good following from the investment research community, and have therefore been researched to death. Some look cheap on a p/e or PEG basis, yet they trade at a premium to net assets which make them look expensive on that measure. Some have an attractive forecast dividend yield, yet have a less enthusiastic write-up from research analysts.