Earlier this year housebuilders were breathing a sigh of relief as the surging mortgage rates seen in the wake of the mini-Budget eased.
As AJ Bell investment director Russ Mould explains that’s no longer the case amid sticky UK inflation and the prospect of higher rates for longer.
“Ahead of a string of updates from the sector, negative commentary from investment bank JPMorgan is putting the likes of Persimmon and Barratt Developments on the back foot, he says.
“Housebuilders are already factoring in a big downturn in earnings and dividends so the issue is how deep/long is the downturn, not whether there will be one.”
Yesterday Cairn Homes – which builds predominantly in Ireland – reported
core revenue of €215m in the first six months of the year, down from €240m reported in the same period in 2022.
The company also closed 535 new homes sales, slightly below the 547 new home sales recorded in the first half of 2022. The results did not instil any panic and the builder nticipates growth in the second half of the year, with profit and cash generation heavily weighed to this period.
But what of Cairn Homes counterparts in the UK? Many are due to provide trading numbers in the next few days and weeks.
As Mould explains, Persimmon suggested earlier this year that completions in 2023 could reach the top end of the 8,000 to 9,000 guided range.
“If the York-headquartered firm does manage to complete on 9,000 dwellings that would still mean a 40% drop from last year’s total of 14,868 and completions is the first number analysts will check”. (When the housebuilder reports on 6July).
Analysts’ expectations are for a near-halving in pre-tax profits to £368m in 2023, and that is against a base that was depressed by 2022’s £275 million in additional provisions for cladding compensation costs.
Barratt Developments is due to release a trading update on 13 July. The shares are down by around a tenth over the past twelve months, and more than half from their pre-pandemic peak, thanks to worries over higher interest rates, mortgage availability, housing affordability, input cost pressures and an end to Government support schemes such as the stamp duty tax break and Help to Buy.
As Mould points out Barratt chief executive David Thomas began the year by guiding to between 18,400 and 18,800 completions, flagging efforts to manage input cost inflation and plans to grow completions over time to 21,5000.
“The autumn’s Trussonomics chaos, sticky inflation and rising interest rates have done for that and now Barratt is guiding to completions between 16,500 and 17,000.
“That is the first figure to which analysts will turn, as the mid-point will mean a drop of around 7%. Any steer on average selling prices will also be welcome, with last year’s average of just under £341,000 as the base for comparison”.
