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THE HOUSE BUILT ON SAND
Let’s think about the New Testament
parable (see Matthew 7.24-27)
The wise man built his house on stone
Then a great flood came there, and winds blew there, and fell down
upon the house, and it did not fall: truly, it was built on stone
Then the foolish man built his house on sand Then it rained, and a
flood came there, and winds blew, and fell down upon the house, and
the house fell; and its fall was great
And there were these great big UK builders of houses, Persimmon,
Taylor Wimpey, Barratt, Bellway, Bovis and Redrow and they enjoyed
many, many good years. Demand for homes exceeded supply due largely
to archaic planning laws, too few planning officers and for those
that did exist too little commercial nouse and with fire- in-belly
long since doused and so, where development took place, ticky-tacky
houses grew like the slums of old and massed together with no room
to breath, no room to grow and no room to swing a cat. People who
knew the industry would say that out of the selling price to these
new slum dwellers, one third went on the cost of the land, one third
on building the tat and the final third was clear profit. Of-course
that may be an exaggeration but certainly net profit margins were
exceedingly high and the good times did roll.
So why was it that when the rains came, the great builders fell like
the proverbial pack of cards? It is because our dear and much
lamented friend Prudence went walkies, she sauntered into the flood
and was never seen again and how those that sent her into the storm
must regret their lack of caution.
You see, all that lovely lolly went walkies along with our Prudence.
It went in the direction of directors’ fees, management salaries,
generous dividends to the loyal shareholders (not forgetting the
share options) and finally and most fatally it went on our old and
faithfully intangible friend Goodwill (see "How to read a Balance
Sheet"). What goodwill? Well, the elusive difference in price
between what the net assets are worth and what we have decided to
pay for our competitor so that we can gobble him up and make
ourselves even bigger and stronger, better able to pay out more
bunce. Get it? For example there was once a builder called Westbury.
A very successful provincial builder with ideas above its station,
it even had buildings put up off-site and built in a factory to
reduce the inefficiency of labour intensive activity on site. By
dint of its very own success, it was expensive to gobble up; but it
was so gobbled and the goodwill was immense. It took much of the
profit reserves of Big Builder to acquire.
But this was only one of many acquisitions by Big Builder or, put in
more sanguine tones, only a small part of reasonable
"rationalisation" of the industry. Yet there is no natural logic to
bigness if it takes away the profit of the past in a trade whose
cyclical nature is as old as the proverb itself. Why was the fat of
the good times not put aside for the lean years that had to come?
Why was the house built on sand? |
