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Barratt Developments Forecasts Reduced Home Constructio
Barratt Developments, the UK’s leading housebuilder by volume and second-largest by stock market value, has issued a warning of a potential decline in home construction. The company anticipates building at least 20% fewer homes compared to the previous year. In the fiscal year ending in June, Barratt completed 17,206 homes, but for the current financial year, the projected range is between 13,250 and 14,250 new homes
Macroeconomic Factors Impact Barratt’s Construction Outlook
Barratt Developments attributes its reduced construction target to significant macroeconomic headwinds, such as persistent inflation and a higher interest rate environment. These factors are expected to influence UK economic growth, employment rates, consumer confidence, and spending. The company has already experienced a decline in total housing completions, with a 3.9% decrease in the past financial year. The first six months of 2023 saw a notable drop of 12.8% compared to the same period the previous year.
Impact of Interest Rate Rises on Homebuyers
The rapid pace of interest rate increases by the Bank of England is beginning to affect homebuyers, particularly first-time buyers. The conclusion of the Help to Buy scheme and the rise in mortgage interest rates resulted in a 49% reduction in first-time buyer reservations compared to the previous year. Existing homeowners demonstrated more resilience in terms of demand for properties.
Government Policies and Market Conditions
Barratt Developments tactfully avoids mentioning the government’s abandonment of its target to build 300,000 new homes annually. Industry experts believe this decision dampened activity in the sector. Housebuilders criticize the government, particularly Housing Secretary Michael Gove, for diluting requirements for councils to plan for increased housing, influenced by pressure from Conservative backbenchers. Additionally, Gove’s decision to shift the cost burden of cladding replacement onto housebuilders impacted the industry’s perception of government support.
Financial Outlook and Preparation
While Barratt’s shares experienced a temporary decline of 4.5% following the announcement, the company offers some positive aspects in its statement. It expects inflation to ease, with build cost inflation projected to decrease from 9-10% to around 5% this year. Pre-tax profits are anticipated to meet market expectations, and Barratt, along with other housebuilders, is in a stronger financial position compared to the last period of high interest rates 15 years ago and the financial crisis. The company ended the previous fiscal year with net cash of £1.070bn, reflecting a healthier financial position than in 2008.
Barratt’s Resilience in a Changing Market
While there are signs of storm clouds gathering over the housing market, including an increase in defaults on mortgage payments, Barratt Developments and other housebuilders have learned from past boom-and-bust cycles. They have fortified their balance sheets and positioned themselves to better withstand challenges. Barratt’s substantial net cash position of over £1bn instills confidence in the company’s long-term prospects, enabling it to capitalize on opportunities, particularly if land prices decline.