Housebuilder shares dip ahead of crunch interest rate call

Shares in housebuilders have dipped ahead of a crunch Bank of England decision on interest rates expected at noon today.

Persimmon’s share price fell by as much as 2% on opening before recovering slightly, with the UK’s three largest builders, Barratt, Persimmon and Taylor Wimpey, all trading between 1.3% and 1.5% down on their closing price by mid-morning.

The Bank of England’s Monetary Policy Committee is widely expected to raise interest rates by 0.75 percentage points when it meets today, which would be the biggest single rise in more than 30 years, and which would take the base rate to 3% - its highest since autumn 2008.

Paula Higgins, chief executive of the HomeOwners Alliance said the expected increase in the base rate would presage a “gloomy winter” for homeowners, with “few homeowners” able to avoid “rocketing rates”.

Market sentiment toward housebuilders was impacted overnight after the US Federal Reserve itself raised interest rates by 0.75% and dampened expectations that rates might be able to reduce any time soon, while the Nationwide’s chief financial officer yesterday told the Treasury Committee of MPs that house prices could fall by as much as 30% over the next year, in a worst-case scenario.

The real mortgage rates that home buyers are paying have already increased hugely in recent weeks in the wake of the Truss government’s ill-fated mini budget, with the cost of an average two-year fixed-rate mortgage rising from 4.74% prior to the announcement, to 6.46% by yesterday, according to Moneyfacts.co.uk.

See also: Can HAs keep going as the rest of the market slows?

See also: House prices fell sharply in October, says Nationwide

However, expectations over the extent of future interest rate rises have reduceded from the weeks immediately after the mini budget, when rises of 1 percentage point and higher were predicted, given chancellor Jeremy Hunt’s decision to backtrack on the vast majority of the inflationary measures contained in the original statement.

The expected rate rise comes as Savills today released forecasts predicting a 10% fall in house prices over the next year. Mortgage lender the Nationwide this week said prices fell by 0.9% in October, its first recorded monthly drop in prices since July 2021.

Shadow chancellor Rachel Reeves said today’s decision would means higher mortgage rates for families across Britain and “anxiety and yet more pressure on household finances.”

CEO of Alliance Fund, Iain Crawford, said increasing rates to the level predicted could “stun” those who previously in a position to buy. “This will not only dampen their enthusiasm within the sales market in terms of the price they are willing to pay for a property, but it’s likely to keep many exiled within the rental sector for quite some time more,” he said.

Marc von Grundherr, director of estate agent Benham and Reeves, said an increase will do “little to revitalise the declining level of buyers entering the market, with many now finding they simply can’t afford the cost of borrowing compared to just a few short months ago.”