Housing heat begins to cool

THE first signs that Britain's booming housing market may be heading down, after a full-point rise in interest rates since November, are starting to emerge.

But despite the apparent change in sentiment the Halifax, the nation's biggest mortgage lender, is projecting a 16% jump in house prices for 2004, against an 8% forecast at the start of the year.

The upward revision at the Halifax is hardly surprising in that the lender already has reported that prices are up 9% so far this year. But it believes the first evidence is emerging of a drop in the pace of activity following recent interest rate changes.

Anxiety also has been increased as a result of last week's alert from Mervyn King, Governor of the Bank of England, who cautioned that 'the chances of falls in house prices are greater than they were'.

An update on housing from Capital Economics picks up a number of indicators suggesting the bubble-could be bursting. Surveys from the Royal Institute of Chartered Surveyors and estate agents show a fall in buyer enquiries in May.

As importantly, data from the mortgage lenders showed a sharp decline in lending in May. Rightmove says its survey in the first days of June shows a fall in prices in five out of the ten regions it covers.

It would be surprising if buyers were not heeding the warning from King and starting to hurt a little as repayments gobble up more of their after-tax income. But in the present upswing, we have been here before. Prices have eased back and then soared to new peaks.

So far, the Bank's gradualist approach of raising interest rates by a quarter point at a time has been largely shrugged off by borrowers. This has been possible because unemployment is low and average earnings, particularly in the private sector, have been rising.

But we may soon be at a point when borrowers recognise that taking on more debt, at this mature stage of the housing cycle, does not make any sense at all.

High stakes

ONE of the great puzzles surrounding Philip Green's bid for Marks & Spencer is why the normally bold entrepreneur did not seek to build a strategic stake when the shares were much lower.

This time around the track Green, with his blue-chip equity partners, was determined not to make any moves that could be misconstrued by the defenders of the St Michael citadel.

Despite the rejection of Green's 370p offer by the M&S board, on the basis of valuations not yet shared with investors, the Bhs and Arcadia proprietor still believes it was a good offer. He notes he would also be taking on large liabilities in the shape of M&S's debt, its pension fund deficit and obligations in staff options.

It is because he believes the price he is offering is in the right territory, despite some fanciful estimates of up to 435p (from SG Equity Research) that Green is now engaging Brandes and the other American value funds Capital Group and Artisan on price.

This is not simply an academic matter. Having bought at an average price of 270p, Brandes is presently sitting on a potential profit of a £1 a share. It has been holding M&S for almost four years, longer than most of its stakes.

Brandes must also be aware that if it sought to sell or place its stake in the market, it would probably have to do so at a discount given the current exceptional price.

So the real objective of Green and his partners would be to secure an agreement to buy the Brandes stake at or near to his offer price to the M&S board.

This would give his Revival vehicle a platform to put increased pressure on M&S or to make an all-out offer to all M&S shareholders. M&S may wish Green would go away, but he shows no signs yet of fatigue.

Swann's way

PENSION funds have long been a factor in takeover bids. In the glory days of surpluses, the pension funds offered a tasty extra to bid experts like Hanson. Now it works in the opposite way, as is illustrated at WH Smith.

The apparent unwillingness of Permira to fund the WH Smith deficit left chief executive Kate Swann and the board with little choice but to tell the buyer to take a hike.

So now it is plan B for Swann, who is proposing to raise some new cash by selling off or demerging publisher Hodder Headline. Part of the £200m or so raised will be used to bolster the pension fund. But Swann also faces the tougher task of turning WH Smith around in the full glare of being a public company.

The shares look set for some unsteady days ahead.