Britain’s largest housebuilder, Barratt Developments, has suffered a double-digit drop in annual profits after a significant slump in demand, as the surge in interest rates and the end of the help-to-buy scheme drove away first-time buyers.
Demand from would-be homeowners fell by 49% in the year to June, which dragged on overall sales and accounted for half of the total decline in its home reservations.
While demand from existing homeowners was more resilient, buyers across the country have become increasingly cautious about taking on new debts given the rapid rise in interest rates, which have made monthly mortgage payments more expensive.
The UK base rate has climbed from 0.1% to 5% in just over a year and is expected to rise further in the months ahead as policymakers try to reduce inflation. The base rate rises have so far pushed the average rate on two-year fixed-rate mortgages to 6.75%, the highest level since the 2008 financial crisis, according to Moneyfacts.
“We experienced a significant deterioration in demand during the second quarter and, whilst the position improved during the third quarter, reservations then slowed more than normal,” Barratt said.
That surge in rates, coupled with the end of the government’s help-to-buy scheme, which helped first-time buyers get on the property ladder with a 5% deposit, has taken its toll on housebuilders such as Barratt.
Barratt said its adjusted profits would be in line with market expectations, with consensus estimates pointing to £880m for the year to June, according to preliminary estimates. That is down 15% from just over £1bn the year before. “We have delivered a strong performance in what has been a challenging year,” the housebuilder said in its trading update.
However, the figures spooked investors. Barratt shares fell by 4% to the bottom of the FTSE 100 in early trading.
The trend is likely to continue, though, with the Royal Institution of Chartered Surveyors (Rics) reporting that the steep rise in rates, as well as anxiety about the prospect of an economic downturn, had sent new homebuyer inquiries to an eight-month low in June.
While the housing market was in better shape than the period after Liz Truss’s disastrous mini-budget last autumn, Rics said the index pointed towards “a renewed deterioration in UK home sales”.
Rics’ survey of estate agents showed that new buyer inquiries has slipped from a net balance of -20% in May to -45% in June, which was the lowest reading since October 2022’s balance of -51%.
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Meanwhile, UK lenders reported their highest level of mortgage defaults since the aftermath of the financial crisis, signalling a squeeze for those already owning homes.
The Bank of England credit conditions survey showed that the net balance of lenders experiencing defaults on secured loans to households had risen from 14 to 30.9 in the second quarter. That is the highest reading since the second quarter of 2009, when the same indicator rose above 60.
Barratt said it was aware of the headwinds but was comfortable with its cash position and would focus on sales to private landlords in the months ahead. It said that it had the “resilience and flexibility to adjust to changes in the operating environment”.
