Interest rate rise biting into housebuilder sales -

Interest rate rise biting into housebuilder sales

UK housebuilding giant Bellway has confirmed that demand for housing has “moderated” since the summer. As a result, the company expects sales to be flat during the current trading year compared to the 12 months up to 31 July 2022. During this period, Bellway reported home completions up 10.5% on the previous year, with a 13% increase in revenue up to £3.5 billion. Excluding exceptional charges, annual profits increased by 22.5% to £650 million, but this year will be challenging.

Strong order book starting to dwindle

In a trend likely to be replicated across the industry, Bellway started the new financial year with a strong forward order book. Initially, the company expected home completions to hit 12,200, but this figure is now more likely to be around last year’s figure of 11,198. As UK interest rates continue to increase, there are growing concerns that the UK is heading for recession, with mortgage finance becoming more expensive. Recently, the five-year fixed rate for mortgages hit 6% for the first time in over a decade.

Related article:   How do inflation and interest rate increases affect your finances?

Slow autumn selling season

While the reduction in demand for housing began in the summer, recent events in the money markets have prompted a sharp decline in autumn reservations and sales. The mini-budget from the previous Chancellor, Kwasi Kwarteng, drove a massive increase in borrowing costs. This forced mortgage providers to withdraw more than 1000 products from the market, leaving many homebuyers facing an uncertain future.

Housebuilding sector in retreat

It is said that the stock markets price companies on their prospects 6 to 9 months in advance. Consequently, with Bellway shares falling from a high of £25 in April to the current level of £18, this would seemingly reflect the challenges facing housebuilders. The current Help to Buy scheme, which offers part government funding for first-time buyers, is set to end on 31 October. While there has been no confirmation, many experts believe this scheme will be extended beyond the current end date. In theory, this should offer a degree of support to housebuilders but against a backdrop of constantly rising interest rates, will it have any real impact?

Related article:   Inflation data suggests interest rate hikes not working

UK interest rates

Even though the money markets have steadied somewhat with Jeremy Hunt, the new Chancellor, taking a very different approach to his predecessor, rates are still expected to rise. Before the recent increase in borrowing costs and fall in sterling, UK base rates were expected to peak at 3% towards the end of 2023. However, the latest consensus suggests that rates will peak at a staggering 6% which means little downside for mortgage rates in the foreseeable future. This will be reflected in short to medium-term mortgage deals with the days of “cheap finance” seemingly well behind us.

Related article:   Mortgage approvals and consumer lending fall as inflation bites

Short-term outlook

The next MPC meeting is scheduled for early November, with experts split between a 0.75% or 1% increase in base rates, with the same again in December. This would fit with the government’s intention to publish the budget on 31 October – with the Bank of England unlikely to change rates ahead of the publication.

However, Andrew Bailey, the governor of the Bank of England, attended a meeting in Washington only a few days ago. In that meeting, he suggested that base rates could rise even more than market expectations in the short term. Current expectations and speculation do not bode well for the housebuilding sector.