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Spectator Money - Features

We’re in a post-Brexit building boom

The prospects for housebuilders are much brighter — but their shares still look cheap

1 October 2016

8:00 AM

1 October 2016

8:00 AM

Interest rates rocketing back to 1990s levels. Foreign investment funds fleeing for Frankfurt and Paris. The pound in free-fall, and the government slashing spending as a consequence of a collapsing economy. Foreign-born construction workers returning home in horror. Amid all this chaos, estate agents would be about as popular as Donald Trump in Mexico City, building sites would be closing down, and house sales would be less frequent than Southern Rail trains.

Yes, if you rewind to the beginning of summer, that was the consensus on what would happen to the building industry if the electorate was crazy enough to vote to leave the EU on 23 June. And yet, like so many of the cataclysmic Brexit warnings, events have not unfolded that way. In fact, it is now becoming clear that bricks and mortar will be one of the sectors that does best from the Brexit boom. Why? Because house prices will keep rising, planning restrictions should be eased, the government will boost spending, and on the labour supply aside, the industry will be one of the least affected by exclusion from the EU single market.

In the immediate aftermath of the referendum result, the view in the market was that construction, and housebuilding in particular, was doomed. Companies in the sector lost up to 40 per cent of their value, wiping £8 billion off businesses that included well-known names such as Taylor Wimpey, Persimmon, Barratt and Berkeley. It was always a bit hard to work out the logic of that sell-off: it looked more as if the market had just decided to trash someone, and builders happened to be the most convenient target.
Insofar as anyone could make sense of it, investors seemed worried about the warning from former chancellor George Osborne, dark overlord of Project Fear, that house prices would fall by 10 to 20 per cent in the event of a Leave vote.

If that had happened, it would indeed have spread carnage throughout the sector. Building a house takes a long time, and if its value is going down with every day the bricklayers and roofers are working on it, and if buyers are holding off because they think prices will be cheaper next month, then the economics of the industry are grim. Fortunately, however, that proved no more accurate than all the other predictions of imminent disaster. House prices have sailed on upwards much as they were doing before the vote — that is to say, up a bit, but not dangerously fast.

After the dust has settled, the outlook for housebuilders, and the construction industry more -generally, now looks a lot brighter. There are five reasons why.


First, while there may yet be damaging long-term consequences from leaving the EU, in the short term it has given the economy a boost. The Bank of -England has cut interest rates and relaunched quantitative easing, while the market’s sharp devaluation of the pound has helped exporters. Lower interest rates and a faster-growing economy should feed through quickly into healthier house prices — and those are the most critical factor in keeping the sector -buoyant. Even if the economy does flag next year, which is what most pundits still expect, it would be no surprise if the Bank and the government pumped money directly into the building industry, as they did with the Help to Buy scheme in the last recession.

Second, expect to see more infrastructure projects launched. In the wake of Brexit, the government has abandoned its target of balancing the books by the end of this parliament. We’ll see what chancellor Philip Hammond comes up with in his Autumn Statement, but it looks likely that he will ramp up spending, especially if it counts as investment. Expect the go-ahead for some headline-grabbing new projects, from a decision at last on London’s new airport runway to an upgrading of our creaking power network. Again, that will be a huge boost for the big construction firms.

Third, the labour supply will keep flowing. As we all know, Eastern Europeans have come over to Britain in their hundreds of thousands to work in the -building trade. Overall, 12 per cent of workers in the UK -industry are foreign-born. If that was suddenly cut off, the industry really would suffer. No one, including the government, has any clear idea what Brexit will look like yet , but even if free movement of European workers is ended, it now looks likely to be replaced by a work-permit system. So it’s highly unlikely that the supply of skilled construction workers will -suddenly dry up.

Fourth, the Leave vote has persuaded the political establishment that a huge segment of the electorate is fundamentally unhappy with the status quo. A big part of that is the slow-motion housing crisis. Homes have become increasingly unaffordable, while near-zero interest rates and the QE boost to asset prices are making the problem worse.

Right now, demand massively outstrips supply: we build about 150,000 houses a year, but need at least 220,000 to keep pace with a rising population and new household formation. If net immigration comes down as a result of Brexit — a big if — then it still won’t mean we have an excess of housing supply. The main bottleneck is a thicket of planning laws and regulations that hinder new building. Most of it has nothing to do with the EU, but leaving could still be the -catalyst for ripping up the red tape. If so, building would be a fast-growing industry again.

Finally, it will soon be clear that the construction industry is one of the most detached from the EU. Building, which accounts for almost 8 per cent of Britain’s GDP, is the second least internationally traded sector— the only one with less international involvement, rather obviously, being government. Nobody exports houses or roads. Nor are its supply chains bound up with the EU: most building materials are manufactured in the country where they are used, because cross-border transport costs are too high.

Many manufacturers will certainly notice the -difference if we leave the Single Market, but few builders will. They don’t sell anything in Europe, and they don’t buy much from Europe either.

Indeed, since the referendum, the sector’s results have all been positive. Barratt chief executive David Thomas said, on releasing results in September, that simply ending uncertainty has helped improve its performance. Its pre-tax profits were up 21 per cent year-on-year. Redrow reported profits up 23 per cent. Berkeley said sales of some new homes had been deferred ahead of the vote but had caught up since, and that the impact had been minimal.

That confidence is reflected in share prices. -Redrow has recovered from its post-referendum low of 294p to slightly more than 400p. Barratt has bounced from 388p to 488p. The same is true across the sector. But they are mostly still significantly down on where they were on 22 June. That looks crazy. There is no logical reason why the builders should be worse off once we are out of the EU — and plenty of reasons for thinking they might well do considerably better.


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