Barratt Developments, Britain’s largest housebuilder, experienced a significant 56% decline in annual profits due to a sharp drop in demand. The decrease in demand can be attributed to the surge in interest rates and the conclusion of the help-to-buy scheme, which deterred first-time buyers.
In the year leading up to June, demand from potential homeowners plummeted by 49%, adversely affecting overall sales and accounting for half of the total decline in home reservations. Although existing homeowners displayed more resilience in terms of demand, buyers across the country have grown increasingly cautious about taking on new debts as a result of the rapid rise in interest rates, which have made monthly mortgage payments more expensive.
Over the course of just over a year, the UK base rate has risen from 0.1% to 5%, with expectations of further increases in the coming months as policymakers seek to decrease inflation. These base rate rises have already propelled the average rate on two-year fixed-rate mortgages to 6.7%, the highest level since the 2008 financial crisis.
Barratt acknowledged this significant decline in demand, stating that while the situation improved in the third quarter, reservations ultimately slowed more than usual. The surge in interest rates, combined with the cessation of the government’s help-to-buy scheme, has taken a toll on housebuilders like Barratt.
Preliminary estimates suggest that Barratt’s adjusted profits for the year ending in June will amount to £180m, down from £412.5m the previous year. However, these figures align with market expectations. Barratt emphasized its strong performance throughout a challenging year in its trading update.
Nevertheless, these figures spooked investors, leading to a 4% decline in Barratt shares early on in FTSE 100 trading.
This trend is expected to continue, as the Royal Institution of Chartered Surveyors (RICS) reported that the steep increase in interest rates, alongside concerns about a potential economic downturn, resulted in new homebuyer inquiries reaching an eight-month low in June.
While the housing market is in a better state compared to the period after Liz Truss’s unfavorable mini-budget last autumn, RICS indicated that the index suggests a renewed deterioration in UK home sales.
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RICS’ survey of estate agents revealed that new buyer inquiries dropped from a net balance of -20% in May to -45% in June, the lowest reading since October 2022’s balance of -51%.
Barratt acknowledged the challenges they are facing but expressed confidence in their cash position and intentions to focus on sales to private landlords in the months ahead. They believe they have the agility and adaptability to navigate changes in the operating environment.
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