Rosalind Evans
Despite posting £705 million in annual profits, the home construction company highlights obstacles in mortgage affordability as a limiting factor for buyers.
The UK’s leading homebuilding firm, Barratt Developments, foresees a challenging landscape for the housing market in the near term, attributing the sluggishness to the increasing costs of mortgages for potential buyers.
Responding to these market conditions, Barratt is significantly scaling back construction activities, even though it reported a robust £705 million annual earnings.
Separate data from S&P Global’s construction purchasing managers’ index corroborated the downturn in the UK’s construction industry, showing activity levels in August at near-historic lows since the onset of the pandemic in May 2020.
The instability in the housing market can be traced back to September 2022 when Prime Minister Liz Truss and Chancellor Kwasi Kwarteng introduced a tumultuous mini-budget that disrupted financial markets. As a result, Barratt enacted a hiring freeze, leading to a 6% workforce reduction, translating to approximately 400 jobs, bringing the total staff count down to 6,000.
Compounding the difficulties, the rise in inflation has further eroded consumer purchasing power, prompting the Bank of England to hike interest rates 14 times incrementally. This has led banks to raise mortgage rates, effectively pushing new homes beyond the financial reach of many.
“Ongoing cost-of-living pressures coupled with difficulties in securing affordable mortgages, as well as an inefficient planning system, are impacting new developments,” stated David Thomas, CEO of Barratt Developments.
Despite the sluggish market, Barratt emphasized the enduring and growing gap between the demand for and supply of housing.
Experts and some government officials concur that not enough homes are being built to meet long-term demand in the UK. This persistent demand keeps house prices near record highs even as economic growth stumbles. According to data from the Nationwide Building Society, average home prices have declined by 5.3% in the year leading up to August, standing at around £259,000.
While increased construction could alleviate some of the inflated housing prices amid the current economic strain, builders, including Barratt, are cautious about maintaining their profit margins by limiting construction. Barratt built 17,206 homes in the fiscal year ending June 30, a 3.9% decrease from the previous year. The company aims to further reduce its construction output for the current fiscal year to between 13,250 and 14,250 homes, marking a decline of up to 20%.
Barratt revealed that cost-cutting measures implemented since last September have boosted its profit margins by one percentage point to 18.3%. Its pre-tax profits rose by 10% to £705 million. Nonetheless, the company’s profits have declined under adjusted figures accounting for one-time changes.
Barratt also noted that the inflation rate for home prices is lagging behind the increase in construction costs, which puts additional pressure on profitability.
The UK’s housing market is grappling with complex challenges—from rising mortgage rates and inflation to policy missteps and an ineffective planning system. Despite these obstacles, Barratt Developments remains profitable but cautious, signalling a potential industry-wide contraction in construction. The path to market stabilization remains uncertain as experts and policymakers weigh in on the persistent imbalance between housing demand and supply. Yet, the overarching question is whether the industry can adapt quickly enough to serve the long-term needs of a population grappling with affordability challenges, without sacrificing profitability.
