The perils of Persimmon and how easy monetary policy helped create excess profits

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by Shaun Richards

One of the main themes of my work is that  the monetary easing by central banks has boosted asset prices, but the catch is that for example rises in house prices are inflation for the first-time buyer as well as those trading up. So the theme that it is all wealth effects is untrue. But we find that the effort to pump up house prices has also involved governments and in the UK much of this has been focused on the Help To Buy scheme. There are two main problems with this of which the opening one is simply that if you give people “help” in this form it is only brief because house prices rise to the new amount that can be afforded rather quickly. This creates windfall gains for existing home owners and the companies that build the houses. It is the latter we will focus on as there is a candidate in number one position for earning what in my days as a student were called “excess profits”. So one bit of economics 101 exists even if it is only good news for the shareholders and managers of in this instance Persimmon Homes.

Persimmon

From Reuters earlier.

Britain’s Persimmon Plc, which is under scrutiny from the government for its practices under the “Help to Buy” scheme, on Tuesday named interim Chief Executive Officer Dave Jenkinson to the role on a permanent basis.

The company, whose former CEO Jeff Fairburn stepped down last year amid backlash surrounding his bonus package, reported a 13 percent rise in full-year pretax profit to 1.09 billion pounds ($1.43 billion)

So profits are now over a billion pounds and we can remind ourselves that at Persimmon profits were at an excess level on an individual basis as we go back to the 22nd of October last year.

The boss of house building firm Persimmon has walked off in the middle of a BBC interview after being asked about his £75m bonus.

“I’d rather not talk about that,” Jeff Fairburn said, when asked if he had regrets about last year’s payout.

The £75m, which was reduced from £100m after a public outcry, is believed to be the largest by a listed UK firm.

In this instance we can spell excess profits with one word, greed. Returning to the company itself I explained back then how the excess profits were built up.

But the real problem is that Help To Buy provided what is called in economic theory excess profits for housebuilders. We have looked before at how it helped them to make high profits on the sale of each house and it also boosted volumes in a double whammy effect.

This morning we have been provided with some numbers to that effect. From the BBC.

Almost half the homes it built (7,970 out of 16,449) sold through the Help-to-Buy scheme Average selling price of all its homes: £215,563…….Mike Amey, managing director of global investment management firm Pimco, told the BBC that profit per household at Persimmon had trebled since Help To Buy was introduced.

I think he means per house built but we get the idea. So we see that Help To Buy has allowed Persimmon to build more houses at treble the previous profit. This has led to this.

The Persimmon money machine rolls on, profits past the £1bn mark and £2.2bn returned to shareholders in the past seven years, with the promise of more – much more – to come. ( BBC)

When Help To Buy started back in April 2013 the share price was around £9 as opposed to the current £24 and of course as noted above money has also been returned to shareholders. I guess that avoids the rise in the share price becoming even higher. As the current market capitalisation is £7.6 billion according to Investing.com the extra dividends have been both significant and material.

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Shoddy Work

This is a section my late father would be more than happy for me to emphasise. His work as a plastering subcontractor saw him work on one estate which was built so badly it was easier in the end to knock it all down. Another was where the architect was proud of his inward sloping balconies and ignored warnings of the dangers, well until it rained anyway. So let me note that the excess profits have not been accompanied by high quality work.

Persimmon has been dogged by complaints about poor build quality among Help to Buy customers – with satisfaction rates remaining below its 4-star target of 80%. ( SkyNews )

Reuters have suggested the housing minister James Brokenshire is now on the case.

However the company – along with some others in the sector – has attracted criticism for practices such as selling houses with rising leasehold charges which make them hard or impossible to sell on, and for poor quality workmanship.

“Leasehold, build quality, their leadership seemingly not getting they’re accountable to their customers, are all points that have been raised by (the minister) privately,” the source said, echoing a report in The Times newspaper.

The issue with leasehold charges is a national disgrace. The issues concerning leasehold and freehold ownership were supposed to have been settled years and indeed decades ago. Yet the scandal goes on and nothing has been done about it.

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Comment

The environment remains extremely favourable for the likes of Persimmon and it continues to receive a bit more than a helping hand from the Help To Buy scheme. This is because whilst we have seen some house price falls these are mostly around central London where prices are too high for Help To Buy anyway. We are left to observe a scheme that has enriched one group of people the shareholders and massively enriched the managers and directors. It is not as if the quality of the work has been high and in fact the reverse seems to be the case.

There is a clear issue in the way that these things have been allowed to persist as we all make mistakes but even if we give the government a free pass on the first year or two we cannot give it a free pass on the way it has allowed this to persist. I do hope that government ministers will not in the future be joining housebuilders boards of directors.

If we move to monetary policy there may be further relief for house builders if the evidence of Sir David Ramsden to Parliament earlier is any guide.

I agree with the MPC’s collective view
that the monetary policy response to Brexit, whatever form it takes, will not be automatic and could
be in either direction.

Also Governor Mark Carney points out this.

Although the principles guiding the MPC’s choice of threshold still hold, the creation of the
Term Funding Scheme had reduced the effective lower bound on Bank Rate from ½% to 0%.

Also the Governor has got himself into something of a mess with this statement.

The MPC now views that the level from which Bank Rate can be cut materially is now
around 1½%.

So the cut from 0.5% to 0.25% was not “material”? Odd because I recall him claiming that it has saved around 250,000 jobs……

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