UK homebuilders under pressure as high mortgages deter FTBs

UK property price

Even a potential restoration of the government’s “Help to Buy” scheme, which offered incentives to FTBs, will not be enough to improve affordability, experts have said

UK homebuilders are building fewer homes, cutting down on land purchases and offering more incentives as high mortgage rates and the absence of immediate aid from the government make homes less affordable for first-time buyers.

Top UK residential builder Barratt said this month it would build nearly 20% fewer homes in its fiscal year 2024, while high-end builder Berkeley anticipates annual sales to decline by a fifth.

Mid-cap companies Bellway and Crest Nicholson have also pointed to high mortgage rates hindering demand from FTBs.

Moreover, even a potential restoration of the government’s “Help to Buy” scheme, which offered incentives to FTBs, will not be enough to improve affordability, experts have said.

The scheme offered incentives like the payment of just 5% of the purchase price as minimum deposit, and exemption from interest payment for the first five years.

Builders can only build if buyers can purchase, and the absence of certainty of demand will clearly have an effect on industry confidence and its ability to invest in new land and sites, stated Steve Turner, executive director at Home Builders Federation.

Nevertheless, homebuilders are introducing measures to strengthen demand as they look to hold on to prices.

Bellway stated that it continues to use targeted incentives at specific locations of the country to draw customers and secure reservations.

Peel Hunt analyst Sam Cullen stated housebuilders are providing incentives of 4% to 5% of the selling price, up from nearly 3% in March and April.

Persimmon, one of the UK’s largest homebuilders heavily exposed to FTBs compared to its FTSE 100 rivals, has offered a “10-month mortgage-free” deal to new customers.

Berkeley’s chief executive officer, Rob Perrins, has even called for abolition or a sharp cut in stamp duty.

The permanent cut in stamp duty announced in September’s mini-Budget was rolled back by finance minister Jeremy Hunt in the autumn statement in late 2022, and the incentive will stay in place only until March 2025.

While incentives could go some way to attract buyers, experts say purchasing power will continue to stay low as the BoE keeps rates at higher levels to manage inflation.

A key British mortgage rate – the average two-year fixed rate – reached a 15-year peak of 6.66% in July, rising above levels hit as a result of September’s mini-Budget crisis.

Nevertheless, a bigger-than-expected decline in inflation in June and the resulting cutting back of rate hike expectations have calmed investor nerves to some extent. Still, the housing sector faces an uncertain path to recovery, because of the ultra-high mortgage rates.

The Times in May reported that the government was preparing to strengthen support for FTBs, and the Help to Buy scheme could form part of Hunt’s autumn statement due in November.

Investec analyst Aynsley Lammin said if rates stayed at high levels, there would be an increasing argument to announce some type of FTB support before November.

The government, however, is limited in its capacity to launch incentives in the face of high inflation.

Any potential aid policies need to seriously weigh how that would avoid just adding to inflationary pressures, Lammin said.

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