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House builders set up for 'shocks and surprises', Taylor Wimpey update suggests

"Previous commentary from the sector and the forecast consensus has been too bullish," says Shore Capital analyst, Robin Hardy

A recent survey suggested house prices would fall for another six months

Gloomy mutterings from Taylor Wimpey PLC (LON:TW.) about flattening prices and rising build costs suggest the housebuilding sector is in for a tougher time than investors expect, broker Shore Capital has warned.

In a mixed trading update on Thursday, the FTSE 100 builder revealed that build cost inflation had risen to 5% from the 3-4% of recent years, which ShoreCap analyst Robin Hardy said would be manageable if selling prices are rising but, as the Wimpey update confirmed, they are not.

READ: Taylor Wimpey crumbles as it warns Brexit is driving up build costs

With the latest RICS survey suggesting house prices would fall for another six months, Hardy said this had dire implications for sector-wide levels of profit before tax.

“The previous commentary from the sector and the forecast consensus has been too bullish, in our view, and this statement confirms that it is right to be looking for at least a fade in PBT here rather than sustained growth,” the analyst said, adding that the Wimpey update was encouraging him to pencil in a higher rate of profit decline.

This followed a wider industry note from Hardy a day earlier, where he downgraded Taylor Wimpey, along with Barratt Developments PLC (LON:BDEV), Bovis Homes Group PLC (LON:BVS) as he “called time” on the sector.

“There is growing evidence that house prices more widely could fall, and that new homes sector could see more marked actual or effective declines,” he said.

“Weak pricing is the greatest threat to the sustainability of sector margins and, in our view, the risk of shocks and surprises from this source are still under-estimated.”

Quick facts: Taylor Wimpey

Price: 166.35 GBX

Market: LSE
Market Cap: £5.46 billion

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