By Aby Jose Koilparambil and Suban Abdulla
(Reuters) -Britain's largest housebuilder Barratt flagged difficult trading conditions and further margin erosion over the coming months after it posted an annual profit fall on Wednesday, as high mortgage rates continue to pummel demand.
Shares in the FTSE 100 builder fell 2.4% in morning trade, also pulling down the housing sector index about 2%.
Affordability concerns stoked by high mortgage rates and a prolonged cost-of-living crisis have weighed on the UK housing market, with indicators on everything from mortgage demand to construction rates and prices sliding in recent months.
British house prices in August were 5.3% lower than a year earlier, their biggest annual decline since July 2009, mortgage lender Nationwide said on Friday.
"With higher mortgage rates and the degree of uncertainty, it becomes a recipe for the first-time buyer to decide not to purchase, therefore to continue to rent rather than moving on to the housing ladder," CEO David Thomas told Reuters.
Barratt said it expected average sales sites to reduce by around 6% in the current fiscal and also revised its dividend cover to 1.75 times, for fiscal 2024, from 2 times announced during half-year results in February.
"The uncertain outlook is reflected in the shareholder return announcement ... There will be no further share buybacks over the coming period, while the dividend has also been reduced," Richard Hunter of interactive investor said in a note.
The company said forward sales stood at 2.44 billion pounds ($3.07 billion) as of Aug. 27, down 36% year-on-year.
Barratt, which did not provide profit guidance, forecast a reduction in margins and the CEO said that the recruitment freeze announced last year would continue until the market conditions change drastically.
"Cracks are starting to appear in the housing market, and while interest rates should be close to peaking, first time buyers remain under enormous pressure," said Charlie Huggins of financial research firm Wealth Club.
The builder said its adjusted pre-tax profit came in at 884.3 million pounds for the year ended June 30, compared with a company-compiled analyst consensus of 882 million pounds.
($1 = 0.7950 pounds)