HOUSEBUILDERS will be navigating choppy waters for at least the next year as the outlook for interest rates continues to appear uncertain, despite hopes the current cycle of rises has peaked, a leading economist has warned.

The Scottish business scene was rocked on Monday when it emerged that long-established housebuilder Stewart Milne Group had collapsed into administration.

More than 200 people were immediately made redundant as administrators for the Aberdeen-based company said that, like many housebuilders, Stewart Milne had “faced significant challenges over the last few years, with economic uncertainty due to rising interest rates, increasing cost pressure and an associated reduction in consumer confidence”.

When asked if he was surprised to hear the news that Stewart Milne had failed, veteran economist Jeremy Peat told The Herald: “The housing market has been a real mess. That helps to explain it, but it is still a surprise that such an established company should go under in that way.”

READ MORE: Aberdeen: Housebuilder Stewart Milne collapses, jobs lost

There has been a growing consensus that the current cycle of rate rises has peaked, with the base rate having been held by the Bank of England at 5.25% since August. That followed 14 consecutive rises since December 2021, when it stood at a historic low of 0.1%.

Asked if he can see any signs of improvement in the housing market, Mr Peat, a former director of the David Hume Institute and chief economist of Royal Bank of Scotland, and a fellow of the Royal Society of Edinburgh, said: “I think it is going to take some time for mortgage rates to come down. Inflation seems to be trending towards target but there is no guarantee that it will [hit] target, and with the problems that we have got now with shipping, it could be that inflation starts edging up again.

“So, I think the Bank of England will be very reluctant to move speedily on interest rates. And that means we are stuck with a high level of mortgage rates for this year at least. We have got used to very low mortgage rates, so I think this has come at quite a shock. That, I think, is the main factor disturbing the market, along with the fact that again with inflation, a lot of personal incomes have started falling rather than rising. Net incomes are going down in many cases.

“When you have got a combination of stable or declining net incomes and much higher mortgage rates, then the housing market is inevitably going to be the first to take the hit.”

Asked whether there is a risk of other housebuilders failing, Mr Peat said: “I’ve been amazed by how much housebuilding has been going on around the central belt in the last couple of years. They all seem to have sold reasonably well, there doesn’t seem to have been a lot hanging around. But I suspect that we have passed the stable situation. I think the new-build [market] is going to be problematic in large parts of Scotland over the course of this year and next.

READ MORE: Stewart Milne administrators: 'too early' to say on deposits

“Businesses that have got used to a high level of new build, and a good turnover on existing stock are going to find the situation very difficult. I don’t know whether that means they will go under… [but] they are going into difficult waters at least into this year and possibly into next.”

The impact of the higher interest rates has been felt by the major UK listed housebuilders as well as private firms such as Stewart Milne. Recent market updates from the likes of Barratt Developments and Persimmon have indicated that conditions remain challenging, with reservation rates and completions slowing as higher interest rates to continue to make difficult for consumers in the mortgage market. Persimmon was due to report a trading update to the City today.

John Moore, senior investment manager at RBC Brewin Dolphin in Edinburgh, said the strong financial position and economies of scale of the listed housebuilders have helped to ease cost pressures and given them a degree of resilience  amid the challenging conditions. He also said the ongoing “chronic” housing shortage in the UK would underpin for demand in the long term, but cautioned that the economy “is still in an uncertain place, which will weigh on demand”.

Mr Moore told The Herald: “Rising interest rates were inevitably going to dampen demand – particularly after more than a decade of them being rock-bottom. There is, nevertheless, a degree of resilience to demand because of the huge need for more housing provision across the UK – and particularly in Scotland.”

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A similar sentiment was expressed by Susannah Streeter, head of money and markets at Hargreaves Lansdown, who highlighted the “risk of short-term uncertainty” in the sector.

Ms Streeter told The Herald: “What happens next with interest rates is going to be key. If inflation turns out to be stickier than expected, then rates will stay elevated for longer which could ultimately cause more pain for the sector.

“However, it’s hard to ignore that there’s a fundamental undersupply of homes. This isn’t likely to change in the short-to-medium term, and for now, it’s helping to prop up house prices.”

Assessing the outlook for the year ahead, Dan Coatsworth, stock market analyst at AJ Bell, suggested conditions will remain tricky for housebuilders and homebuyers in the near term. He said: “Higher interest rates have taken a toll on the UK housing market and affordability is expected to remain an issue well into 2024. Mortgage arrears have been creeping up and house prices edging down.

“While all signs suggest interest rates have peaked in this cycle and lenders are cutting mortgage rates, the dream of home ownership could still be fantasy rather than reality for many individuals for some time.

“That means housebuilders will have to proceed on a cautious path. These companies have battled inflation over the past few years including the price of raw materials and higher salaries which led to an industry-wide review of overheads.

“While the pace of inflation for build costs has slowed and provided much relief to the sector, delays to planning approvals will impact the pace of future profit growth for housebuilders.”

Colin McLean, director of Edinburgh-based SVM Asset Management Holdings, said the earnings of UK national housebuilders have provided a "mixed picture" of late, but noted that “completion numbers [are] up and share prices in [the] sector have bounced strongly in past two months”.

He added: “Investors are thinking more about a general election, bringing more focus on UK economic growth and housebuilding being part of this.”

Mr McLean observed that cash flow is "critical" to housebuilders, meaning that they "must convert completions and WIP (work in progress) into cash as fast as possible". He said: "That’s usually the main cause of distress. And the value when that happens is typically in the land bank."