The boss of Berkeley Group has said the property market will remain “choppy” until interest rates settle, as the housebuilder forecast a 20% drop in sales this year.
Mortgage rates have soared in recent weeks, as the Bank of England’s attempts to reduce stubbornly high inflation have fed through into lending deals, pushing the average interest on a two-year fixed loan above 6%.
UK inflation unexpectedly remained at an annual rate of 8.7% in May, adding to the pressure on the Bank to increase the cost of borrowing further at its meeting on Thursday. Another interest rate hike of at least a quarter of a point, to 4.75%, seems all but certain, with the odds of a half-point increase rising.
Rob Perrins, Berkeley’s chief executive, said: “The [housing] outlook is going to be choppy for a while until interest rates settle, which brings confidence back into the market.” He said housebuyers needed certainty on how high rates will go. Financial markets are now betting that the Bank base rate will peak at 6% early next year.
Berkeley’s share price fell 2%, as investors were surprised by the inflation figures and sold off shares in housebuilders. Shares in rivals Barratt, Persimmon and Taylor Wimpey also fell by more than 2%, amid concerns in the housing sector about rising mortgage rates.
Data from the Office for National Statistics on Wednesday also showed house price rises slowed to an annual rate of 3.5% in April, down from 4.1% in March. It was a different picture in the rental market, where tenants were hit by the fastest increase in rents in at least seven years.
Private rental prices increased by 5% in the 12 months to May, the biggest rise since the series began in 2016.
Berkeley – which operates across London, southern England and Birmingham – reported a 9.5% rise in pretax profit to £604m in the year to 30 April, but said trading so far suggested sales would be about 20% lower in the current year.
The company said it was still seeing “good levels of inquiry for well-located homes” but added that the housing market was “likely to lack urgency” until consumers had a better idea of how mortgage rates would change over the coming months. Those buying were either existing homeowners who wanted to move, or investors with available funds.
Berkeley flagged “signs of some financial distress” in its supply chain, as contractors such as cladding firms and bricklayers continued to grapple with the tail of the impacts from Brexit, the Covid pandemic and the war in Ukraine on top of the current economic backdrop. Of the housebuilder’s 150 subcontractors, 20 have gone into receivership, as the market tightened. Berkeley said it had tried to help by paying them weekly.
The housebuilder said interested buyers tended to favour housing developments that were closer to being finished, rather than projects two to four years away from completion. It said its forward sales were worth £2.1bn but the value of those reservations was 15% lower than in the previous year.
Berkeley – which specialises in redeveloping brownfield land such as the Oval Village project in Lambeth, bringing together four derelict gasholders and an adjacent supermarket and warehouse in south London – said it would continue to invest in its existing regeneration sites.
However, Perrins cautioned over new investment. The builder said that with a complex and slow planning system, high building costs, increased regulation, higher corporation tax and the proposed new building safety levy, the supply of new homes in London and the south-east would continue to fall.
