Builders and estate agents braced for UK housing downturn

Signs of a slowdown in the housing market have been brewing since spring but this week provided the clearest indications yet that a protracted drop in activity and prices could be in store.

Some of the UK’s largest housing developers said fewer buyers were reserving new homes from them in recent months.

Estate agent Winkworth suggested rising interest rates were already cooling the market as it reported a near 40 per cent fall in sales.

And a series of closely watched confidence measures showed the UK housing market looking increasingly likely to tip into a downturn.

Changes in the market prompted by sharply rising inflation mark an abrupt end to conditions that have been highly supportive for property developers over the past decade, with borrowing costs low and stable, and the government introducing a number of policies to underpin housing demand.

“Trading since July 1 has definitely been more challenging,” said David Thomas, chief executive of Barratt Developments, the UK’s largest housebuilder, which announced its full-year results on Thursday.

“There’s no question that consumer confidence is low and there’s uncertainty in terms of cost of living, inflation and the political backdrop,” he added.

If demand continued to flatline or fall, developers would start offering incentives such as free carpets to tempt buyers back. “Bringing down the price is very much a last resort,” Thomas said.

Greg Fitzgerald, chief executive of Vistry Group, which struck a £1.25bn deal to acquire rival housebuilder Countryside Partnerships last week, agreed the challenges in the economy had put a brake on house price growth.

“Up until April, I think we were operating in an unsustainable market, with house prices rising too fast. Now we’re back to a historical norm,” he said.

“The only thing that concerns me about the market at the moment is [developers’] share prices,” he added.

Shares in listed developers have fallen around 40 per cent over the year to date, with investors pricing in house price falls and a sustained slowdown.

Housing sales have dropped for five months in a row, according to the Royal Institute of Chartered Surveyors, the property sector’s professional body.

When RICS asked its members what they thought would happen next, it found they were “the most downbeat they have been since the series began in 2012.” The large majority of members expected housing sales to drop in the year ahead.

“Concerns over the economic backdrop and rising interest rates continue to take their toll on market momentum,” said Tarrant Parsons, senior economist at RICS.

“Given projections for the UK economy point to a potential recession emerging towards the end of 2022, [survey] respondents envisage housing sales continuing to slip in the coming months,” he added.

There are already indications that house prices are plateauing, after two years of runaway growth.

Over the past 12 months, average house prices have risen 11.5 per cent to £294,260, according to Halifax. But they are up just 0.2 per cent since June, according to the bank.

A summer slowdown is not unusual, but with the economy tipped for recession and the long era of ultra-low interest rates at an end, there are fears the downturn will last far longer than a few months.

Homebuyers have faced the additional hurdle of mortgage rates rising sharply just as their deposit savings are threatened by rising living costs.

“There are now signs that buyers in some areas are becoming more cautious of excessive valuations, taking note of rising inflation and interest rates and either making the most of available mortgage offers or reassessing their timings,” said Winkworth’s chair Simon Agace.

The government’s flagship housing scheme, the Help to Buy equity loan, is also being withdrawn, dealing another blow to housebuilders, and developers have clashed with ministers over plans to tax the sector to fund the repair of buildings that have defective cladding or other fire safety risks.

With inflation forecast to rise to around 20 per cent next year, economists expect that interest rate rises will continue, with borrowing costs not returning to their former levels for the foreseeable future.

Despite the mounting risks, one big positive for the sector remains: that housing is chronically undersupplied in the UK.

“The market has been affected by all of the above,” said Thomas, at Barratt. “But step back and look at the fundamentals: a big driver of house price inflation over the last 20-30 years has been inadequate supply.”