By Aby Jose Koilparambil
(Reuters) - "Holiday on us!" That is how British homebuilder Persimmon (LON:PSN) tried to lure buyers earlier this year, offering thousands of pounds towards a holiday in return for new-home booking at one of its projects.
Persimmon is not alone. Several British homebuilders are dishing out incentives, ranging from free modular kitchens to discounts on downpayments, in a desperate attempt to jumpstart demand as high interest rates bump up home loan costs and dent sales.
The British housing market is in the middle of its worst catastrophe since the 2008 global financial crisis as fears of more rate hikes pummel demand.
Barratt, UK's largest housebuilder, said its incentives were running at 5%-6% of the house price versus 1%-2% a year ago, while Persimmon noted that it was using incentives in a "very controlled manner" at around 3.2% per plot.
"For first-time buyers, it (incentive) is based around the challenge with affordability. If they have a 5% deposit, then deposit boost works well where we give an additional 5% so that they can secure a 90% loan-to-value mortgage," said a sales director with Persimmon.
Investec analyst Aynsley Lammin said the incentives were at the highest level in a number of years.
Homebuyers prefer financial incentives amid a long-drawn cost-of-living crisis that has squeezed personal finances.
Some builders are offering first-time and next-home buyers the option to buy a new-build home with a minimal deposit, sometimes as low as 2% of the total price, while some incentives allow customers to reserve a property for even below 100 pounds.
With inflation running at several multiples above its target, the Bank of England has added 515 basis points to borrowing costs from just 0.10% in less than two years, making it much more expensive to pay off a mortgage.
"Move in without a mortgage" is another compelling offer, which allows first-time buyers to occupy the property with minimum deposit in return for a rented stay. This helps buyers save money and expand affordability towards full ownership.
Some homebuyers are opting for exchange options, where the builder purchases the buyer's existing property and the payment helps fund the new-home purchase. In some cases, builders are also assisting buyers with the sale of their current homes.
"Mortgage holidays", offered by Persimmon and other builders, are also popular among homebuyers with builders contributing towards home-loan payment during a specific period.
Non-cash benefits such as bearing the costs of house moves, carpets or expensive door handles and providing kitchen modules for free are also popular.
KNOCK ON MARGINS
The incentives, while aimed at boosting demand, come at a cost for homebuilders struggling to keep costs low.
Persimmon said last month sales incentives and marketing costs shaved off 2.1% from its half-year gross margins.
Peel Hunt (LON:PEEL) analyst Sam Cullen said a builder with a relatively lower price point was more likely to give an offer that puts cash back into the pocket of the buyer, while high price-point players give incentives on plush kitchens.
Most housebuilders were at their maximum level from an incentive perspective, he warned.
"If demand was to weaken further, the next step to stimulate demand would be to cut headline house prices," said Cullen.
However, most builders have said that prices are holding up quite firmly despite the dwindling demand.
Persimmon said its average selling price (ASP) rose 4% to 256,445 pounds during the first half of 2023, while Taylor Wimpey (LON:TW)'s ASP increased 6.7% to 320,000 pounds.