UK housebuilders' rally on shakier ground in 2014


* Strong rally in UK housebuilders to slow next year

* Short interest rises, sector index falls in November

* No sign of bubble yet, but rate hike prospect a headwind

By Atul Prakash

LONDON, Nov 24 (Reuters) - UK housebuilders' shares havemore than doubled in two years as home prices have recovered,but an uncertain interest rate outlook and rising costs meangains look more modest - and more precarious - in 2014.

Government schemes, including the "Help to Buy" programme,which guarantees up to 15 percent of applicable mortgages,helped push house prices to an 11-year high by one measure lastmonth, fuelling concerns about a potential bubble that couldburst when interest rates eventually rise.

House prices will rise on average 4 percent this year and5.5 percent next and even more in London, according to a Reuterspoll of market watchers.

British finance minister George Osborne has played down talkof overheating and asked the Bank of England for annualrecommendations on the impact of the Help to Buy programme,starting in September 2014.

Housing is politically sensitive in Britain. Home ownershipis widespread, and rising or falling house prices are a majorfactor in consumer confidence. Critics say the governmentschemes are designed to prop up prices before a general electiondue in 2015.

There are signs the rally in housebuilders is losingmomentum, with negative bets on the sector doubling in the pastfour weeks, while monthly net sales of real estate fundsdomiciled in Europe - including the UK - fell 70 percent inSeptember from a year earlier, according to Lipper data.

"As a sector, they (housebuilders) had an extremely goodrun, but they are likely to take a breather. I am notencouraging people to pile into them," Charles Stanley analystTom Gidley-Kitchin said.

"I am not hugely positive, but also don't think that themarket is going to crash over the next couple of years."

The Thomson Reuters UK Homebuilding index has surged 50 percent so far this year after a 64 percent jumpin 2012, but fell 5 percent this month after hitting a recordhigh in October. It has fallen in four of the past six months.

Markit data shows stock lending in the sector doubled overthe past weeks, indicating an increase in short positions - astrategy under which investors sell borrowed stocks inanticipation of a decline in the price, hoping to buy back morecheaply later and pocket the difference.

Among the risks for the sector is the possibility that UKinterest rates could rise sooner than expected as the economicoutlook improves and the job market recovers.

Higher rates don't just make mortgages more expensive, theyalso curb demand and prices for homes and shrink homebuilders'margins.

Analysts said although UK interest rates were not likely torise before 2015, continuing speculation about the timing ofsuch a move would keep investors and homebuyers nervous.

The Bank of England this month cut its inflation forecastsand said unemployment could fall much more quickly than itpreviously thought to the 7 percent level, at which it wouldstart to think about raising interest rates.

UK homebuilders also face a rise in the costs of land andbuilding materials as increasing demand exceeds supply, puttingpressure on their profit margins.


Analysts said shares in housebuilders were expected to risefurther in 2014, albeit more slowly than in the past two years.They predicted at best 10 to 20 percent gains next year.

"I would be cautious in buying homebuilders and feel themarket is a bit toppy," Commerzbank economist Peter Dixon said.

"It might be a good place to be, but not for too long. Youhave to make sure you pull your money out at the right point."

The sector, which shrank sharply to survive the propertydownturn after the financial crisis, faces rising costs on topof long-standing difficulties in getting projects approved underBritain's strict planning rules.

Barclays started coverage on the sector this month with an"underweight" on Bellway and Bovis Homes and an"equal weight" on Berkeley and Persimmon. Itis, however, broadly positive on the sector and is "overweight"on Barratt Development and Redrow.

It is not just the builders who have benefited in the boom.

Analysts said companies such as property website Rightmove, which has surged 70 percent to a new high this year,could also feel the pinch of any housing market weakness.

Some analysts also said it was too early to say if the UKproperty market was overheating.

"The government's support for UK housebuilders is veryhelpful. They have a good few years to go and make decentreturns," said Charlie Campbell, property analyst at LiberumCapital.

"But you are not going to have another year of 60-70 percentgrowth in their share prices."

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