Barratt Developments Warns of Significant Drop in Home Completions Due to Macro-Economic Headwinds

The company's total housing completions in the financial year just ended were down 3.9% on the previous 12 months, reflecting a year of two halves.

The last six months of 2022 saw Barratt complete 6.9% more homes on the same period in 2021, but during the first six months of 2023, completions were off 12.8% on the same period a year earlier.

The company explained that following the end of Help to Buy and increases in mortgage interest rates, first time buyer reservations in the year reduced by 49% compared to the year to the end of June 2022 and accounted for more than half the decline in its total reservation rate.

Demand amongst existing homeowners was more resilient.

Barratt also noted that it expects inflation to start easing this year, with build cost inflation coming in at around 5%, compared to 9-10% in the previous financial year.

Pre-tax profits are also expected to be in line with market expectations, and the company has a healthy financial position with net cash of £1.070bn even after completing a £200m share buy-back and spending £820m on land during the year.

However, the company's shares fell by 4.5% at one point, dragging down fellow FTSE 100 builders Persimmon, Berkeley Group, and Taylor Wimpey, as the housing market continues to face challenges from rising interest rates and inflation.

Some households may also face an extra £6,000 on annual mortgage bills due to the recent interest rate rises.

The government's abandonment of its target to build 300,000 new homes a year and the Housing Secretary Michael Gove's watering-down of requirements for councils to plan for more homes have also contributed to the challenges facing Barratt Developments, the largest housebuilder in the United Kingdom, has seen its stock price fall by 35% in the past six months, as the company grapples with the effects of the COVID-19 pandemic and a slowing global economy.

The company has been hit hard by reduced demand for new homes, with sales down 21% in the first half of the year.

In response, the company has announced a strategic review, which could include cutting costs, selling assets, and focusing on its core housebuilding activities.

In addition, the company has announced plans to reduce its debt by selling non-core assets and delaying investments.

These actions come as the company faces significant challenges, including a slowing economy, reduced demand for new homes, and increased costs associated with the pandemic.

The company has also been impacted by increased competition from smaller players, who have been able to more easily adapt to the changing market conditions.

However, despite these challenges, Barratt Developments has been here before.

In the early 1990s, the company was on the brink of collapse, but was able to turn things around through a combination of cost-cutting measures, a focus on core activities, and a reduction in debt.

The company has also experienced similar challenges in the past, including the housing market crash of 2008-2009, when it wrote down the value of its land bank by more than £590m and was forced to raise £720m through a sale of new shares.

Despite these challenges, the company appears better positioned to weather the current storm than in previous cycles.

With strong balance sheets and a net cash position of more than £1bn, the company is well-positioned to take advantage of opportunities in the long term.

In addition, while house prices have fallen only modestly compared to previous cycles, there are signs that the market is facing storm clouds.

According to Bank of England data published today, the number of defaults on mortgage payments has increased by the greatest amount since 2009, suggesting that the market may be facing challenges.

Despite these challenges, it appears that the housebuilding industry, and Barratt Developments in particular, have learned the lessons of past boom-and-bust cycles.