The markets will be paying close attention to whether Persimmon or Taylor Wimpey give any indication they expect a collapse in house prices this year when the two contractors report this week.
The two housebuilders are due to reveal their financial results for last year on Wednesday and Thursday amid a growing sense of unease in the sector.
The housing market is struggling at the moment, with HM Revenue and Customs (HMRC) data showing that 96,650 homes were sold in January, the lowest level since 2015 and 11 per cent fewer homes than the same month last year.
House prices have also started to cool off, with Halifax data from earlier this month suggesting that the average house sold for more than £12,000 below its August peak in January.
High street banks have been preparing for a significant drop in house prices, with Lloyds the latest to warn its own investors of a potential “mortgage shock” later this year. It has predicted a 7 per cent drop in average asking prices this year; Nationwide think it will be a 5 per cent drop, while Santander is the most pessimistic with a 10 per cent loss projected.
It comes as interest rates have been rising, adding to the cost of taking out a mortgage. The Bank of England’s base rate has hit 4 per cent – up from 0.1 per cent a little over a year ago – and could rise further still.
“Persimmon’s feeling the pressures of a tough housing market, and the group’s valuation has tumbled around 40 per cent in the last 12 months as a result,” said Aarin Chiekrie, an equity analyst at Hargreaves Lansdown.
“We’ve already heard that ‘notably weaker’ customer demand and higher cancellations pushed full-year forward sales down from £1.6bn to £1.0bn in 2022.
“And as the mortgage rate environment remains challenging for home buyers, we don’t expect to hear things picking up in this area.”
Analysts at Citi suggest that UK housebuilders and building products sectors have both had a good start to the year, “driven by an improving sentiment and expectations of a soft landing”.
But the strength of developers in the medium term “relies crucially on the outlook of mortgage rates and house prices”, the bank’s analysts added. Though seasonal demand has risen year-on-year, and recent reductions in mortgage rates are supporting more stable asking prices, any gap between achieved and desired asking prices will be “keenly watched”.
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Chiekrie said the results next week will show in more detail how the business is being impacted by rising costs, and how badly they are hitting its profitability.
“But we’re most interested in the outlook statement. The group should give an indication of how forward sales have been at the start of this year, as well as what the rest of 2023 could look like.
“The fear is that the current dip in house prices could be the start of a bigger correction.
“If that looks like the case next week, there could be a negative market reaction, despite a lot of concerns already being priced in.”
Meanwhile analysts expect revenue at Taylor Wimpey to hit £4.44bn, up from £4.28bn a year earlier. Pre-tax profit is expected to hit £900m, up from £679.6m in 2021.
Investors will also keep an eye on Rightmove, which updates the market on Friday with its full-year figures, for an alternative indication of activity in the property markets.
