Barratt Warns of Challenges Ahead as Mortgage Availability Remains Uncertain

Forward Sales Dip and Mortgage Concerns Persist

Britain’s largest housebuilder, Barratt Developments, has sounded a cautionary note about the property market. Prospective buyers continue to face hurdles in securing affordable mortgages, leading to a tough landscape for the company.

Decline in Forward Sales

Barratt’s forward sales dropped to 9,221 in the three months ending on October 8th, a significant decline from the 13,314 sales recorded in the previous year. Forward sales represent agreements between builders and buyers to finalize sales on specified dates. These sales, valued at £2.4 billion, are £800 million less than the previous year’s figures.

Uncertain Outlook

The company emphasized the “uncertain” outlook for the upcoming year, with the availability and pricing of mortgages being of paramount importance to the long-term health of the UK housing market. The recent slowdown in the market was exacerbated by a significant decline in UK house prices, the most pronounced annual drop in 14 years. This was partly attributed to the repercussions of last year’s disastrous mini-budget and successive interest rate hikes by the Bank of England.

Impact of Help-to-Buy Scheme and Ongoing Challenges

The absence of the government’s help-to-buy scheme, which assisted first-time buyers, has also taken a toll. This scheme constituted 12% of Barratt’s private home sales a year ago, with applications closing on October 31, 2022. In response to market conditions, Barratt, like other housebuilders, has curtailed land acquisitions and is maintaining a “highly selective approach” for the next year.

Mortgage Rate Challenges

Mortgage rates surged as the Bank of England implemented 14 interest rate hikes since the end of 2021, reaching 5.25%. While the rates were unexpectedly held steady at a September meeting, many mortgage holders hoped that borrowing costs might have peaked. Some lenders have since reduced rates, but they remain notably higher than in recent years.

Buyers Seeking Longer-Term Solutions

Rising living costs and high asking prices have led many individuals to seek “marathon” mortgages lasting up to 35 years to make payments more manageable. This trend reflects the caution exercised by new homebuyers due to increased mortgage expenses and decreased availability.

Industry Challenges and Market Conditions

Charlie Huggins, a portfolio manager at the investment adviser Wealth Club, acknowledged that Barratt is making efforts to navigate the current housing market challenges. The company has implemented cost-cutting measures, reduced land acquisitions, and provided enhanced incentives to buyers. However, market conditions remain a substantial factor influencing the company’s fortunes.

Bellway’s Similar Challenges

Bellway, another prominent housebuilder, recently slashed its output estimate for the year by a third and reported an 18% decline in full-year profits to £533 million. The company cited uncertainty in the trajectory of mortgage interest rates and the strength of demand for the upcoming selling seasons as pivotal factors for determining the final outcome.

Barratt’s shares declined by 2% in early trading, valuing the business at just over £4 billion.


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