UK Builders Struggle as High Mortgage Rates and Lack of Government Support Dampen Demand

UK builders are building fewer homes, reducing land purchases and offering more incentives as high mortgage rates and a lack of immediate government support make homes less affordable for first-time buyers.

Britain’s leading homebuilder, Barratt, said this month it would build around 20% fewer homes in financial year 2024, while upscale builder Berkeley expects annual sales to fall by a fifth.

Mid-sized firms Bellway and Crest Nicholson also pointed to high mortgage rates as dampening demand from first-time buyers.

And that’s not all. Even a potential revival of the government’s “Help to Buy” program, which provided incentives for first-time buyers, will not be enough to improve affordability, analysts say.

This program offered incentives such as paying only 5% of the purchase price as a minimum deposit and waiving interest payments for the first five years.

“Builders can only build if buyers can buy and the lack of certainty about demand will clearly impact confidence in the sector and its ability to invest in new land and sites,” said Steve Turner, executive director of the Home Builders Federation, a trade association representing private sector homebuilders in England and Wales.

However, homebuilders are taking steps to stimulate demand as they desperately try to keep prices down.

Bellway said it continues to use targeted incentives in certain areas of the country to attract customers and secure reservations.

Sam Cullen, an analyst at Peel Hunt, said homebuilders were offering incentives worth around 4-5% of the sale price, up from around 3% in March/April.

“Incentives can be an improved kitchen, better carpets or doorknobs, or a partial payment of stamp duty,” Cullen noted.

Persimmon, one of Britain’s biggest homebuilders with high exposure to first-time buyers compared to its FTSE 100 counterparts, has offered new customers a “10 month mortgage free” offer.

Berkeley CEO Rob Perrins has even called for a drastic elimination or reduction of stamp duty.

The permanent stamp duty reduction announced in the September mini budget was reversed by Finance Minister Jeremy Hunt in the autumn statement late last year and the incentive will only remain in place until March 2025.

While the stimulus may help woo buyers, experts believe purchasing power will remain depressed as the Bank of England keeps rates high to fight higher-than-expected inflation.

One of Britain’s main mortgage rates – the average two-year fixed rate – hit a 15-year high of 6.66% this month, topping levels hit in the aftermath of September’s “mini-budget” crisis.

However, a larger-than-expected drop in inflation in June and the subsequent reduction in rate hike expectations eased investors’ nerves somewhat. Nevertheless, the housing sector faces an uncertain path to recovery, given the very high levels of mortgage rates.

GOVERNMENT SUPPORT

The Times reported in May that the state was developing plans to boost assistance for first-time buyers and that the “Help to Buy” program could be part of Mr. Hunt’s fall statement, due in November.

Aynsley Lammin, an analyst at Investec, said if rates remained high there would be growing arguments for announcing some form of help for first-time buyers before November.

However, the government is limited in its ability to introduce incentives in the face of runaway inflation.

“Any potential aid policy must seriously consider how it would avoid adding to inflationary pressures,” Lammin added.

Housing has proven to be a major battleground ahead of the next general election scheduled for January 2025, which raises the question of whether the government has enough fiscal space to undertake such support measures.

Last month, the finance minister ruled out any significant financial help for existing mortgage holders.

Meanwhile, investors will be waiting for demand updates when a few well-known homebuilders report their half-year results next month.