Gloomy sector news sent housebuilding shares plunging today, led by a 7% tumble for Barratt Developments PLC (LSE:BDEV), but trends are likely to improve through the autumn, says Barclays.
House sellers are increasingly cutting prices to secure deals even as the normally busy autumn selling season gets under way, data from Zoopla showed.
Discounts have increased to 4.2% from the original asking price over the past four weeks, representing an average of £12,125, the highest level since March 2019, the property portal reported.
Adverse impacts of mortgage rate hikes earlier in the year have only just begun to manifest, analysts at Barclays said.
However, a downward trend in mortgage rates offers hope for the housebuilding sector's shares, the analysts said.
Following the Bank of England's pause on interest rates, a decline in swap rates has led to a small but growing number of lenders trimming their mortgage rates, kindling optimism for the autumn months.
Many moving parts to housing market
The current average advertised rate for a two-year mortgage deal, catering to 80-89% of the property value, has dropped to 6.3%, marking a 40 basis points fall from its peak in late July.
Correspondingly, the two-year swap rate is at 5.1%, down by 40bps since September began, and significantly lower than its July peak.
However, house price measurements have been sequentially weaker, the analysts noted, with data from Nationwide and Halifax recording monthly drops of an average of 1.4%, a dip from July's average decline of 0.3%.
While August is typically a softer month for housing prices, but this year, Rightmove reported a steeper drop than the five-year August average fall of 1.3%, while the August RICS survey echoed this bleak sentiment with a downturn from the previous month.
July's mortgage approvals also dipped to 49k, a 9% drop from June, and a staggering 22% decline year-over-year. The figures fall 25% below the long-term average recorded before the Covid pandemic.
Reasons to be cheerful (if you invest in builders)
Nevertheless, Barclays forecasts a rebound in mortgage approvals year-on-year this autumn, as comparisons will be against the disruptive mini-budget of the previous year.
The road ahead is complex, but Barclays sees reasons to be optimistic, assuming the swap rate remains little changed, which it expects to lead to mortgage rates continuing to work down in the coming weeks, "moving sub-6%".
They noted that when mortgage rates were closer to circa 5% early in the second quarter, house-builders reported sales rates that were down around 20-25% with flat pricing, rather than the 40-45% falls seen seen through the summer.
While this paints a brighter picture, Barclays also pointed out a potential area of caution, with average mortgage rates were slightly higher quarter on quarter, "highlighting the degree to which interest rate increases have yet to fully feed through to existing home-owners".
Barratt was the outlier in terms of share price falls, Taylor Wimpey PLC (LSE:TW.) was down 1.3%, Bellway PLC and Berkeley Group Holdings PLC (LSE:BKG) 0.8% and Persimmon PLC down 0.3%.