The UK housebuilding industry is facing a challenging time as higher mortgage rates put pressure on the market for new homes. This has led to concerns that profits will decline, leading to potential job cuts and reduced dividend payouts.
Crest Nicholson is the latest company to issue a profit warning, expecting its pre-tax profits to fall by 64% this year. Taylor Wimpey is also anticipating a decline in profits of up to 52%, while Persimmon expects a halving of its pre-tax profits.
The combination of higher borrowing costs and the withdrawal of the government’s Help to Buy scheme has created a “perfect storm” for the sector, according to David O’Leary, executive director at the Home Builders Federation. Companies are taking measures to protect their short-term profitability, including cutting costs and considering job cuts. Several companies, such as Persimmon, have already reduced their dividend payouts, and more cuts are expected in the industry.
The big question is how long this downturn will last. While homebuilders have not yet lowered their sale prices, analysts warn that they may be forced to do so if the UK economy continues to weaken or interest rates remain high for an extended period.
Despite these challenges, house prices have remained relatively resilient thanks to cash buyers. Halifax figures show that prices only fell by 0.3% in July. Taylor Wimpey has even reported a rise in average selling prices. However, Peter Truscott, CEO of Crest Nicholson, believes that housebuilders are unlikely to reduce prices due to the high cost of acquiring land. Instead, they may focus on retaining prices and allowing sales volumes to fluctuate.
Analysts predict that profits in the industry will remain flat next year, with any rebound unlikely until the second half of the year due to ongoing high mortgage costs. The average two-year fixed residential mortgage rate is currently at 6.7%, close to a 15-year high. It is not expected to fall below 5% this year.
In addition to financial challenges, larger housebuilders are also facing increased regulatory scrutiny. The competition watchdog is investigating whether the concentration of land ownership among a small number of companies is slowing down the development of new homes. Smaller housebuilders have been particularly affected by industry pressures, with many considering scaling back construction. Planning constraints have also been cited as a significant issue for housebuilders, making it difficult and time-consuming to secure local authority approval.
Despite these challenges, larger housebuilders are better positioned to weather the storm due to stronger balance sheets. Companies like Taylor Wimpey have net cash positions. However, there is concern that a prolonged downturn could drain these resources.
Cost-cutting measures are one way for the industry to protect profitability. Crest Nicholson is considering job cuts and reviewing its overall cost base. However, the Home Builders Federation warns that job cuts can have a long-lasting impact on a sector that relies on an aging workforce. Training builders takes time, and expertise is built up over many years.
One potentially positive development for the industry is the slowing of building materials inflation. Although the rate of increase in input costs has slowed from 10% to 4-5%, this relief is not enough to offset the impact on profits this year.
Overall, the UK housebuilding industry is facing significant challenges. Higher mortgage rates, the withdrawal of government schemes, regulatory scrutiny, planning constraints, and rising costs are all impacting profitability. While house prices have remained resilient for now, the industry is expected to see flat profits next year. The question now is how long the downturn will last and what measures can be taken to mitigate its impact.