By Aby Jose Koilparambil
(Reuters) - British homebuilders are building fewer homes, cutting down on land purchases and offering more incentives as high mortgage rates and the lack of any immediate support from the government make homes less affordable for first-time buyers.
Top UK residential builder Barratt said this month it would build around 20% fewer homes in its fiscal year 2024, while high-end builder Berkeley expects annual sales to fall by a fifth.
Midcap firms Bellway (LON:BWY) and Crest Nicholson (LON:CRST) have also pointed to high mortgage rates hampering demand from first-time buyers.
And that's not all. Even a potential revival of the government's 'Help to Buy' scheme, which offered incentives to first-time buyers, will not be enough to improve affordability, analysts have said.
The scheme offered incentives such as the payment of just 5% of the purchase price as minimum deposit and exemption from interest payment for the first five years.
"Builders can only build if buyers can buy and the lack of certainty of demand will clearly have an impact on industry confidence and its ability to invest in new land and sites," said Steve Turner, executive director at Home Builders Federation, a trade association representing private sector homebuilders in England and Wales.
However, homebuilders are chipping in with measures to boost demand as they desperately look to hold on to prices.
Bellway said it continues to use targeted incentives in certain parts of the country to attract customers and secure reservations.
Peel Hunt analyst Sam Cullen said housebuilders are providing incentives running at probably 4%-5% of the selling price, up from about 3% in March/April.
"The incentives could be an upgraded kitchen, better quality carpets or door handles or partial pay on stamp duty," noted Cullen.
Persimmon (LON:PSN), one of Britain's biggest homebuilders heavily exposed to first-time buyers compared to its FTSE 100 peers, has offered new customers a "10 months mortgage free" deal.
Berkeley's CEO, Rob Perrins, has even called for a removal or a drastic cut in stamp duty.
The permanent cut in stamp duty announced in September's mini-budget was reversed by finance Minister Jeremy Hunt in the autumn statement late last year and the incentive will remain in place only until March 2025.
While incentives could go some way to woo buyers, experts say purchasing power will continue to remain depressed as the Bank of England keeps rates at elevated levels to fight higher-than-expected inflation.
A key British mortgage rate - the average two-year fixed rate - hit a 15-year high of 6.66% this month, rising above levels reached in the aftermath of September's "mini-budget" crisis.
However, a bigger-than-expected fall in inflation in June and the consequent scaling back of rate hike expectations have somewhat soothed investor nerves. Still, the housing sector faces an uncertain path to recovery, given the ultra-elevated mortgage rate levels.
GOVERNMENT SUPPORT
The Times in May reported that the state was drawing up plans to boost support for first-time buyers and the "Help to Buy" scheme could form part of Hunt's autumn statement due in November.
Investec analyst Aynsley Lammin said if rates remained at high levels, there would be an increasing argument to announce some form of first-time buyer support before November.
The government, however, is limited in its capacity to introduce incentives in the face of raging inflation.
"Any potential support policies need to seriously consider how that would avoid just adding to inflationary pressures," added Lammin.
Housing has turned out to be a major battleground ahead of the next general election due by January 2025, leaving the question of whether the government has enough fiscal headroom to undertake such support measures.
The finance minister last month ruled out any significant financial help for existing mortgage holders.
Meanwhile, investors will look out for updates on demand when a couple of high-profile homebuilders report half-year results next month.