UK housebuilders’ shares have fallen after a profit warning from Crest Nicholson and data revealing the fastest drop in asking prices in five years. Taylor Wimpey led the FTSE 100 fallers, down 3%, while Persimmon, Berkeley, and Barratt were down about 2%, and Rightmove fell 1%. Crest Nicholson, which warned that it expected to make a profit of about £50m ($68m) this year, compared with the previously anticipated £74m, was the biggest faller on the FTSE 250. The company cited falling house purchases and the end of the help to buy subsidy as factors impacting the market.

What’s happening?

1. Stock Market Slump: UK housebuilding companies have seen a decrease in their stock market value. Specifically, on Monday, some of the biggest housebuilding companies, including Taylor Wimpey and Crest Nicholson, experienced a drop in their share prices.
2. Profit Warning: Crest Nicholson, a prominent housebuilder, announced that they expect to make a profit of £50m this year, which is a decrease from the £74m they predicted in June. This is due to fewer houses being bought in the recent weeks.
3. Asking Price Drop: Home sellers have lowered their asking prices by an average of 1.9% in August. This is the most significant decrease since 2018.

Why is this happening?

1. Rising Interest Rates: The Bank of England raised interest rates from 0.25% in 2021 to 5.25% recently. This is the highest it’s been since the 2008 financial crisis. Higher interest rates mean it’s more expensive to borrow money, which impacts how much people can spend on houses.
2. Economic Challenges: The UK is experiencing high inflation, a slowing economy, and a cost-of-living crisis. All these factors can deter people from buying homes.
3. End of the “Help to Buy” Scheme: This program made it easier for first-time buyers to purchase homes. Its ending has led to a significant drop in the number of these buyers in the market.
4. Overall Economic Uncertainty: Despite a limited supply of houses and fewer sellers under distress, the uncertainty in the economy is discouraging potential buyers.

What do the experts say? Victoria Scholar, from the share trading website Interactive Investor, believes that the combination of expensive mortgages, the cost of living, and a slowing economy is negatively impacting house prices – “Expensive mortgages, wider cost-of-living pressures and a general backdrop of macroeconomic unease with sluggish growth and increasing slack in the labour market are taking their toll on house prices, which are expected to feel further pain as the year progresses.”

Some Context: Even though asking prices have dropped, house prices have been increasing for decades. The recent 1.9% drop in asking prices means the average price decreased by £7,012, making the new average £364,895 on Rightmove. However, this is still £59,000 (or 19%) higher than in August 2019.

In broader terms, the average UK house price was £288,000 in June, which is £5,000 more than a year ago, but £5,000 less than the record set in November 2022.

Current House Market Trends: Tim Bannister from Rightmove highlighted that there’s no surge in properties for sale, and in fact, there are fewer properties available than in 2019. Homes are being sold faster now (55 days on average) compared to 2019 (61 days). However, fewer sales agreements indicate that many potential buyers are struggling with affordability – “The lower level of agreed sales compared with this time in 2019 indicates the affordability challenges that many buyers currently face.”

In simple terms: Economic challenges, especially the rising interest rates, are making it harder for people to buy houses, leading to decreased profits for housebuilders and lower asking prices from sellers. Still, despite the recent drop, house prices are considerably higher than they were a few years ago.