The UK’s housing market is experiencing significant turbulence, with major industry player Barratt Developments signalling a challenging year ahead due to buyers’ difficulties in securing mortgages. This trend underscores the widespread impact of economic conditions on potential homeowners and the housing industry at large.
A Troublesome Climate for Buyers and Builders
Barratt, the leading housebuilder in the UK, has pointed to an increasingly difficult market. The core issue? Prospective homeowners are finding it challenging to obtain affordable mortgages, a situation that’s affecting demand for new homes.
This difficulty is reflected starkly in the company’s recent numbers. Forward sales — commitments by buyers to complete the sale by a specific future date — have dropped notably. They’re down to 9,221 in the quarter ending 8 October, a significant decrease from 13,314 the year before. In terms of value, these sales stand at £2.4 billion, £800 million less than the previous year.
Uncertainty clouds Barratt’s outlook for the upcoming year, with the company highlighting that both the availability and cost of mortgages are crucial to the UK housing market’s sustained wellbeing.
The Housing Market’s Shaky Foundations
Several factors are contributing to the current instability in the housing market. UK house prices have seen their quickest annual drop in over a decade, a consequence of policy decisions and economic conditions. These include repercussions from the previous year’s mini-budget and a series of interest rate hikes by the Bank of England.
Adding to the complexity is the conclusion of the government’s help-to-buy scheme, which significantly buoyed first-time home purchases. Barratt reported that this program was responsible for 12% of its private home sales just a year ago. The deadline for applications was 31 October 2022, marking the end of a pivotal support system for new buyers.
Adapting to an Unsteady Market
In response to these conditions, Barratt, like its peers, has reined in its land acquisitions, opting for a “highly selective approach” in the coming year. David Thomas, Barratt’s chief executive, underscores the challenging trading environment, specifically highlighting the ongoing mortgage challenges confronting potential buyers.
These challenges have been exacerbated by the Bank of England’s decision to escalate interest rates 14 times since late 2021, bringing them to 5.25%. While the rates were unexpectedly maintained during the Bank’s September meeting — a glimmer of hope for current mortgage holders — they are still considerably higher than in past years.
Furthermore, the general public is grappling with increased living costs and hefty home prices, even as the market slows. This pressure has led to a new trend: a surge in young homeowners resorting to “marathon” mortgages. These 35-year agreements dilute monthly payments, albeit at the cost of a longer payment period.
The Broader Picture for Housebuilders
Charlie Huggins, a portfolio manager at investment advisory firm Wealth Club, observes, “New homebuyers are still exercising considerable caution, given the higher cost and reduced availability of mortgages.”
He recognises Barratt’s proactive efforts to navigate the current housing storm — cutting costs, retreating from land purchases, and offering more buyer incentives. However, he also notes the company’s limited control over the broader market conditions dictating its fate.
Reflecting these challenges, Barratt’s shares dipped by 2% in early trading sessions.
Industry-Wide Challenges
The struggles are not Barratt’s alone. Bellway, another prominent housebuilder, has also felt the market’s pinch. The company recently slashed its output forecast for this year by one-third and posted an 18% fall in full-year profits to £533 million. While it completed nearly as many homes this year as its record in 2022, it anticipates a 31% decrease in completions moving forward.
Bellway echoes Barratt’s sentiment, indicating that future outcomes hinge on the path mortgage interest rates take and the demand during the pivotal autumn and spring selling periods.
Looking Ahead
The overarching message is clear: the UK’s housing market is at an inflection point. Both would-be homeowners and industry giants face a period of uncertainty driven by economic pressures and policy changes. As the situation continues to unfold, all market participants will be paying close attention to interest rate trends and governmental policy interventions that could either alleviate or exacerbate current challenges.