What's next for UK Homebuilders after Barratt's trading update?

Barratt just issued its trading update, with the total forward order book of homes down 29.1% from last year, citing increased borrowing and living cost challenges. Will others follow?

UK recession adds to headwinds

UK homebuilders are facing headwinds from several sources. High inflation is raising costs while reducing disposable income from potential buyers. Higher interest rates to fight inflation are increasing the cost of buying homes. And the UK entering recession is expected to continue to depress the market. Britain also has an uncommonly high number of people buying homes with variable-rate mortgages (around 20%), further complicating the outlook. December construction PMI fell into contraction on the same day the Halifax house price index showed the most significant drop since 2009.

Persimmon's dividend policy causes concern

In its update in November, the company tried to put a cheerful face on an otherwise gloomy report, focusing more on the longer term. Management didn't provide guidance in the short term and disclosed reservations were slowing. The company also tightened its dividend policy, which could further worry investors, and might be further clarified in the upcoming trading statement.

Taylor Wimpey faces a high cancellation rate

In its latest trading update, the firm disclosed a significant jump in the cancellation rate to 24% from 14% prior. Taylor Wimpey was one of the less pessimistic firms, without mentioning tightening the dividend and affirming that it was on track to meet operating profit targets. The focus is now on whether the company can match last year's robust completion growth.

Cairn Homes is supported by an Irish base

The company was optimistic in its interim results and affirmed its guidance. Profits more than tripled in the first half of the year, and it was confident that the trend would continue. Being based in Ireland contributed to the different outlook. The company is expected to report new home sales and offer guidance for next year.

FTSE breaks out of a pennant

UK's index recently broke outside a bullish pennant pattern, with the measured move (height of downward leg (H) added to the breakout point at 7500) hinting at a spiral towards 8430. Bulls must recapture the 8k handle first and defend the 7500 and 7300 supports in case of a pullback. Otherwise, the 7k handle could act as support below the swing high of 7220 unless momentum is strong and the price slumps to 6760.

Key takeaways

Barratt has just issued its trading update showing a 29.1% decrease in the forward order book of homes from the previous year; it proves UK homebuilders are facing severe headwinds. Persimmon has tightened its dividend policy, causing concern among investors, and Taylor Wimpey faces a high cancellation rate and challenges to match last year's robust completion growth. Regardless, the UK's index has broken out of a bullish pennant pattern with increased potential for an upward spiral. Can the subsequent trading updates of UK homebuilders support the index?