Housing market looks gloomy, warn builders and mortgage lenders

Announcing its annual results, Barratt Developments warns that trading conditions remain tough and says that it will not reinstate dividend payments

Housebuilders and lenders painted a gloomy picture of the housing market today, with some experts expecting prices to deteriorate sharply in the next 12 months.

Barratt Developments, the country's largest housebuilder by volume, announced in its annual results that it had slashed losses this year, but warned that conditions in the market continued to be tough. A rival developer, Berkeley, said that although trading remained resilient in London, outside the capital "the lack of credit and consumer confidence will act as a constraint to an increase in transactions".

Mark Clare, Barratt's chief executive, said: "While the outlook for the UK housing market is still challenging, our priority remains optimising prices rather than volume and securing high-quality land that will continue to drive our margin recovery."

The latest survey by Halifax showed that house prices edged ahead by only 0.2% during August as activity in the market remained subdued.

The group said that activity had been "largely static" since the start of this year, enabling house price inflation to cool after prices were pushed up last year by a shortage of supply. It added that it expected prices to end the year at about the same level at which they started it.

However, the figures caused some commentators to predict that the housing market was heading for a double dip, with one economist warning that prices could fall by as much as 25% between the start of this year and the end of 2012.

Unlike its rivals Persimmon and Bovis Homes, which have reinstated dividend payments recently, Barratt did not resume its payout to shareholders, after suspending it in June 2008 to save cash.

Like other housebuilders, Barratt is focusing on rebuilding its profit margins devastated by the recession rather than selling large volumes of homes. This approach is starting to pay off: as the group has moved towards building more family homes rather than flats after the collapse of the buy-to-let market, its average selling price has climbed nearly 11% to £174,300 over the past year. Its operating margin increased to 5.9% in the second half.

But while housebuilders have regained some optimism, there are now signs that the mini-recovery that started in the market last year could be fizzling out again. This has dragged down shares in the sector in recent months.

Alastair Stewart, an Investec analyst, said: "The current trading and outlook statements appeared more negative in tone than those made by [Barratt's] peers recently, reflecting our view that the market is slowing more than the industry expected."

Others said that the lack of mortgage finance was limiting the number of buyers able to enter the market. Many potential buyers had adopted a wait-and-see approach amid concerns about the state of the economy, job security and the impact of future tax rises.

Howard Archer, chief European and UK economist for analysts IHS Global Insight, said: "On balance, while we believe that a sharp correction in house prices is unlikely, we do expect them to soften by around 3% over the final months of 2010. Furthermore, it is hard at this stage to be optimistic about house prices in 2011 as the fiscal squeeze will increasingly kick in, which will hit people's pockets and lead to serious job losses in the public sector.

"Consequently, a further drop of around 5% in house prices looks highly possible in 2011, and the drop could well be steeper still. Much will depend on mortgage availability and the number of houses coming on to the market, as well as how well the economy holds up. Therefore, we suspect that house prices will be some 10% lower by the end of 2011."

But other commentators said that the recent dip in prices was not unhealthy as the recovery in the market had got ahead of improvements in the wider economy.

Martin Ellis, Halifax's housing economist, said: "The market is broadly stable, with house price inflation having cooled since last year, when supply shortages helped to push up prices. The improved economy, strengthening labour market and low interest rates are all supporting housing demand. We expect UK house prices will remain static overall in 2010."


Julia Kollewe

The GuardianTramp

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