Britain’s largest home builder Barratt Developments has revealed a slump in demand driven by the mortgage crunch, with new home reservations sliding by a third

The housebuilder’s annual results revealed an increase in its pre-tax profits and revenue but it flagged that new home reservations had tumbled since July from an average of 0.6 homes per week to 0.42 homes per week.

In a July trading update, Barratt revealed that it had built 17,206 homes this year, down 3.9 per cent annually, but it now expects to build almost a quarter less next year – with a forecast of between 13,250 to 14,250 units.

Despite the murky outlook, the Leicestershire-based builder revealed revenue was up by 1 per cent to £5.3billion for the year ending 30 June 2023, in line with expectations, and statutory pre-tax profit rose 9.8 per cent to £705.1million.

David Thomas, chief executive of Barratt Developments, said the rapid rise in mortgage rates as the Bank of England has hiked base rate from 0.1 per cent to 5.25 per cent in under two years was taking its toll. 

The average five-year fixed mortgage rate hit a peak of 6.37 per cent in July, but has since slipped back to 6.19 per cent. Two years ago the average five year fixed mortgage rate was 2.75 per cent. 

Thomas said: We have delivered a strong operational performance in a challenging operating environment.

‘Customers continue to face cost of living and mortgage affordability challenges, and new developments are increasingly constrained by an ineffective planning system.’

Barratt revealed it would cut is final dividend to 23.5p from 25.7p last year and stall share buybacks but added that it had net cash of £1.06billion on its balance sheet. 

Barratt Developments shares were down 1.94 per cent to 434.70p in morning trading on Wednesday. 

Sentiment on housebuilders has been hit as rising interest rates have significantly impacted the housing market, with City forecasters saying the Bank of England’s base rate could peak as high as 6.25 per cent as it tries to bring inflation to heel.

But housebuilders have continued to profit from high house prices, with Barratt revealing that its average private sale price was up 7.9 per cent annually to £367,000. However, Barratt added that this number had slowed from 13.6 per cent in the first half of its financial year to 3.2 per cent in the second half.

Richard Hunter, head of markets at Interactive Investor, said: ‘All things considered, Barratts is playing a decent hand with the woeful cards being dealt to them in the current environment.

The list of headwinds is well-documented and lengthy and is likely to spill over into the new financial year. 

Squeezed mortgage affordability and availability is resulting in waning customer demand, while broader concerns over general economic growth, consumer confidence and spending are all darkening the picture. 

‘At the same time, the removal of the Help to Buy scheme has removed an important plank from first-time buyers and legacy costs for remedial building work continue to come at a significant cost, totalling some £179 million in this period.

He added: ‘The uncertain outlook is reflected in the shareholder return announcement, traditionally a sign of management confidence. 

‘There will be no further share buybacks over the coming period, while the dividend has also been reduced as the group intends to retain its cash to buffer against the upcoming challenges. 

‘Despite the dividend reduction, the projected yield of 7.6 per cent remains punchy given the economic backdrop and will continue to catch the eye of income-seeking investors.’

Markets are pricing in two more interest rate hikes this year in yet more misery for struggling mortgage borrowers.

The Bank of England raised rates by a widely expected 0.25 percentage points yesterday, with some observers thinking there might be another ‘shock and awe’ 0.5 per cent increase.

Traders are now pencilling in another 0.25 per cent rise in September and another in November or December, taking rates to 5.75 per cent. Analysts at Investec predicted a peak of 5.75 per cent this year.

But investment bank ING forecast 5.5 per cent, saying a second 0.25 per cent hike towards the end of the year would ‘largely depend’ on whether inflation in the services sector had slowed.

Yesterday’s increase was greeted with relief by the markets – avoiding a half-point rise provided a sign the central bank was less troubled by the outlook for inflation.

Sterling slipped following the announcement by the rate-setting Monetary Policy Committee (MPC), which voted six to three for the increase in rates to 5.25 per cent, their highest since 2008. 

Two dissenters backed a 0.5 per cent hike and one voted to leave rates at 5 per cent.

The pound initially dropped to a five-week low of around $1.262 against the dollar but recovered to around $1.265. 

On the bond markets, yields on UK gilts fell, meaning the Government is likely to find it cheaper to borrow.

The FTSE 100 ended the day down 0.4 per cent, or 32.47 points, at 7,529.16. But the more UK-focused FTSE 250, which is more exposed to the effects of higher interest rates, closed up 0.1 per cent, or 20.77 points, at 18,833.65.

Economists had been divided about how aggressive the Bank would be, with around a third having predicted a 0.5 per cent hike similar to the one in June.

But traders pared their bets on further rises following the emergence of the divided opinion among the members of the MPC.

‘The vote split indicated we are nearing the peak now,’ Luke Hickmore, an investment director at Abrdn said.

But the Bank warned interest rates could remain higher for longer as inflation, which was recorded at 7.9 per cent for June, was still well above its 2 per cent target.

The MPC said it would keep rates ‘sufficiently restrictive for sufficiently long’ to get inflation back down.

Matthew Ryan, head of market strategy at financial services firm Ebury, noted the Bank was ‘set to raise rates more aggressively than its peers,’ with the likes of the US Federal Reserve having paused their own rate rises.

‘UK rates could remain higher for longer than in most other major nations,’ Ryan said, adding this would help strengthen the value of the pound.

Looking further ahead, Paul Dales, the chief UK economist at Capital Economics, said that the next big surprise would be ‘how fast rates fall in late 2024 and 2025’, particularly if the mounting cost of borrowing triggered a recession.

While the Bank of England did not predict an economic downturn, Governor Andrew Bailey said that growth was still ‘pretty sluggish’ although he maintained that bringing down inflation was ‘going to be good for growth going forwards’.

The Bank cut its growth forecasts for next year and 2025.

For 2024, it expects UK gross domestic product (GDP) to grow 0.5 per cent, down from previous estimates of 0.75 per cent.