Barratt Redrow plc (BTRW) Earnings Call Transcript
October 12, 2022
Earnings Call Speaker Segments
Hello, and welcome to Barratt Developments plc Trading Update Conference Call. My name is Suzanne, and I will be your coordinator for today's event. Please note this call is being recorded. [Operator Instructions] I will now hand over to your host, David Thomas, CEO, to begin today's conference. Thank you.
Thank you, and good morning, everyone. I'm joined this morning by Steven and Mike and of course, John Messenger. Whilst it's only 5 weeks since we last spoke, clearly, we would all recognize that a lot has changed in this period. So we decided that we would hold a call this morning with the trading update. We have continued to see strong levels of customer interest across the country, and this is evidenced in leads per active site. However, potential buyers have proved reluctant to move forward with a purchase commitment. As a result, our net private reservation rate per outlet per week was 0.55 in the period, 35% below the 0.85 rate in the same period for FY '22 and 23.6% below the equivalent period in FY '22. You'll see in the appendix to our statement that our net private reservation rate since the last update, which was to the 28th of August, since that period, our net private reservation rate has reduced to 0.48, a decline of 46.7% on what was clearly strong reservation trend in the prior year. This clearly reflects the response of potential home buyers to increased wider economic uncertainty with cost of living concerns around energy and inflation, and that has been compounded by increased mortgage rates and reduced mortgage availability. Our reservation rate at lower levels also reflects, as we said in September, limited availability of homes for early occupation, clearly given the strength of our forward order book as well as now a 900 basis point decline in the share of reservations using Help to Buy when compared to the same period last year. Against the softer reservation backdrop, we have, however, seen continuing robust underlying house price inflation with pricing on reservations taken in the period continuing to register year-on-year improvement and slightly ahead of our own plans. Our average sales outlets in the period at 351 were 3.8% ahead of the 338 a year ago. The increase in the average outlets is reflecting 2 factors: firstly, a solid floor of new site openings with 25 opening in the period; and secondly, slightly slower sales rate, which has naturally extended the sales life of sites. We continue to expect sales outlet growth of around 3% for FY '23. Total completions at 3,608 were 2.5% below the equivalent period last year, but very much in line with our budget plans. Our site teams and subcontractors have continued to improve our build output, which increased to 367 equivalent homes per week, up more than 9.5% on 335 in the prior period. Our teams have delivered this growth in output without compromising customer service or build quality. We exited the year with total build cost inflation running at between 9% and 10%, and we continue to expect this rate of inflation for the year. I'm also pleased to report that we haven't seen any significant supply chain issues year-to-date. Turning now to the land market and our approach in clearly what are less certain times. We have maintained our disciplined approach to acquiring new land in the period. The elevated level of competition in the land market that we discussed back in September has continued. We are being increasingly selective in land opportunities on which we are prepared to bid and we continue to rigorously apply our minimum 23% gross margin hurdle and 25% return on capital employed. Reflecting this market backdrop, we have approved just 813 plots across 3 sites in the period, which is sharply down on the 3,735 plots across 15 sites in the prior year period. With our existing land bank strength, the increased uncertainty in the sales market and the highly competitive nature of the land market at present, we now expect land approvals will be substantially below replacement levels in FY '23. So to conclude, firstly, we all have to recognize that the outlook is clearly less certain with the availability and cost of mortgages critical to the long-term health of the U.K. housing market. We have seen some stabilization in the mortgage market in recent days, but mortgage rates have moved materially higher, and we will see over the coming weeks how this impacts our sales activity. Based on our completions to date, our strong forward order book, and current market conditions, we expect wholly-owned completions will be in line with those reported in FY '22. Notwithstanding the adjusted completions guidance through also seeing improved pricing, we remain on track to deliver current consensus profit. With our strong financial position and substantial net cash balances, the Board has confirmed its commitment to the GBP 200 million share buyback program announced on the 7th of September. To date, we have purchased 10.6 million shares for an aggregate amount of GBP 39.9 million. Beyond the existing GBP 200 million buyback program, the Board will continue to evaluate the group's future capital allocation as market conditions evolve. Finally, we remain very vigilant and we will respond to further changes in the market and the wider economy as they develop over the coming months. Thank you and we will now be happy to take questions.
[Operator Instructions] The first question comes from the line of Aynsley Lammin of Investec.
Just 2 questions from me, please. Just firstly, on the land. I think you had guided to GBP 1.2 billion of cash spend on land, and then a net cash at the end of the year of around GBP 800 million. Presumably, some of that's kind of already committed. But as you're kind of reducing that land approvals this year, what should we expect the benefit to be versus that GBP 1.2 billion spend? And any guidance for the kind of end of the cash balance, and presumably that will be the difference given the PBT you're still guiding for where consensus is. And then second question, just on recent kind of trading, maybe a bit more color, if you could, please, just around cancellation rates. Have you seen a big step up on cancellation rates? And just on the price inflation, I mean, given where sales rates are, are you seeing zero price inflation? Is there a bit more pressure, more use of sales incentives currently, and as you progress more into the autumn selling season, what you'd expect the home pricing?
Aynsley, so if I kick off in terms of sort of trading cancellations and price inflation, and then Mike will pick up in terms of land spend and net cash. So I think just by way of overview, and I touched on it in the introductory statement, but I mean it clearly has been a fairly extraordinary time. I mean we announced on the 7th of September. We obviously saw the terrible events around the Queen and us going into a period of mourning and then going to the mini-budget and all the events relating to the mini-budget. I think when you stand back and look at that, what we've seen in terms of step-up in cancellations has been quite limited. But having said that, it is a relatively short trading period and we're covering a 5-week period. And clearly, markets are still settling. We've seen statements yesterday from the Bank of England and markets are still settling. So we're obviously reporting a net reservation level, therefore, taking account of the effect of cancellations. And within that, we're seeing 2 things. One is a slight step-up in cancellations and the other is a reduction in the gross reservation levels, which are both feeding into net reservations being down 47% across the period. In terms of price inflation, I would say pricing has held firm. Now I think it would go to recognize that people have been waiting to see how the autumn trading season unfolds. And that was very much what we said in September. The reality is that to date, the autumn trading season has clearly unfolded in a negative way. And therefore, you would expect that you would see more pricing incentives coming into the market, whether that be contribution towards mortgage cost or contributions towards stamp duty and the like. So I would certainly expect there to be some pickup in terms of incentives within the marketplace.
Just one follow-up, if you don't mind. Just on the kind of reservation rate just below 0.5x. I mean, could you just remind us what would you kind of consider to be a normal reservation rate forward in selling season? Obviously, it's been anything but normal in the last couple of years, but just some indication on that would be great.
Well, I could sort of go through lots of different comparable numbers. But I think the reality is that if you go back to our financial year '20, we are clearly comparing against the period that was prior to COVID and we've disclosed those numbers this morning. So in the short 5-week period, we're down by 34% against those more normal trading levels and we're down by 47% against elevated trading levels. So I think whatever way you cut it, the market is down very substantially.
And Aynsley, let me just pick up on the land point. So you're right, we were guiding to GBP 1.2 billion at the year-end. Just to break that down a little bit. Around GBP 450 million of that was contractually committed in the land creditor at the end of last year. And then we were expecting something between GBP 500 million and GBP 600 million to come through from the land approvals that we made during the course of last year. So I think the scope for reduction in that number is probably around GBP 200 million at this stage. And then in terms of what that means for the year-end cash guidance, at the moment, we're holding that at around GBP 800 million. And obviously, that saving that we're making on the land spend will be offset by a reduction in revenue from the reduced completions guidance. So broadly speaking, I think we'll still end up more or less in the same place.
The next question comes from the line of Ami Galla of Citi.
Just 2 questions from me. The first one, just on the overhead cost and how should we think about it going forward? Are there any initial cost actions that you're considering given the tighter mortgage backdrop now? And the second one is on labor cost inflation. Have you seen any changes? I know it's quite a short period of trading that we've looked at. But have you seen any initial signs of changes in the labor cost inflation?
Ami, I mean, if I pick up both of those points. So I think, first of all, just to put it in overall context, that we feel that we have a well-rehearsed plan for market conditions being weaker. A plan originally very much around coming out of 2008, 2009. But then we faced our shock to the market at the time of the referendum, and again, at the time of COVID. And in both cases, we implemented the plan. So I think it's not something that is going to short-term have any significant impact in terms of overheads. It's very much about ensuring that we are not continuing to recruit where we feel that it can be justified not to do so. We're obviously looking very closely at the land market, looking closely at any discretionary expenditure. But none of that is going to feed into a significant short-term reduction in overheads, i.e., if you look over the next, let's say, 9 to 12 months. In terms of labor, the reality is that we're still seeing relatively high levels of employee turnover within the industry. And I think all housebuilders are experiencing that. So it still remains a competitive market in terms of employment. And that clearly -- we then have layered on top of that a cost of living crisis that we have responded to. And I think we will need to continue to respond to it in terms of ensuring that our employees are protected as much as we can within the cost of living crisis. So we would expect to see ongoing labor inflation, and our labor inflation rates have perhaps been running at 5% or 6%, something in that order.
The next question comes from Chris Millington of Numis.
I just want to know if down valuations are featuring in any material way at the moment. That's the first one. Second one, and I appreciate it's a very short trading period you've reported on, but have the sales rate trends been fairly consistent over this 5-week period, or are we seeing an improvement or deterioration there? And the final one is just about where you are in terms of signing up to the building safety fund and what your considerations are there?
Chris, just to make it quick, because we were always going to take your call. Yes. Just in terms of down valuations, I mean, look, I think the short answer is that there's not been anything significant in terms of an uptick on down valuations. The reality is we've seen a slight increase on down valuations. We have seen slight increases if you look over the last, say, 6 months. But it's kind of around the edges. I mean, as I touched on in the overview, we have seen a very firm pricing environment. And as you know, down valuations from the banks have perhaps been running on 1 in 25, 1 in 30 transactions. Whereas very bad times in the market, historically, we might have seen 1 in 4 or 1 in 5. So I don't think at this stage down valuations is a feature. I think when you look at it across the piece and bear in mind that we're talking about substantial reduction in reservations over a 5-week period, I don't think there's any part of the country that you would call out and say, look, this area is materially better or materially worse. Overall, we're clearly down substantially. And in relation to the building safety fund and building safety position, we signed the pledge along with, I think, 44 other developers back in the spring. And we said at the time, we're absolutely committed to get ourselves into a position that we signed the subsequent legal agreement. There is an ongoing discussion with government, which is being led on behalf of the industry by the HBF. And I have no doubt that, that will result in us signing a legal agreement. But clearly, that will take a little bit of time for us to get into a position that, that agreement is finalized.
That's helpful, David. And just quickly to come back on the last 5 weeks of trading, has that been quite a consistent trend, that sort of minus 30% year-over-year?
Yes. I mean, in the 5-week period, we're minus 46...
Sorry, minus 46, sorry. Sorry.
Yes. But I mean just to say on that, I think that we saw deterioration in that trend post the mini-budget. And I think when you look at the backdrop, that's hardly surprising. So as you know, through the period up to the end of August, we were down by 27%, and we probably saw something that was reasonably consistent with that, and then we hit the mini-budget, and it was down very dramatically. So we're now in a position, which I appreciate, it's what we said in September, but it's the reality, it's that we've now got to look at how does the market perform over the next 6 or 8 weeks in the run-up to Christmas. I mean clearly, we are hopeful that we will see some recovery in terms of the trend. But to do that, we're also going to need to see a stabilization in terms of the mortgage market. That's going to be the absolutely key thing, it's going to be pricing, the certainty of pricing and availability of mortgages.
Next question comes from the line of Harry Goad of Berenberg.
Yes. Can you just talk a little bit, please, about how you think about sort of trading almost tactically through this market environment? Is there such a thing as a target sales rate that you're sort of targeting the regional businesses to hit. And with that in mind, just remind us what are the sort of primary levers that the sales teams will be pulling? And I guess the final part of that is how do you think about PX? And do you think PX will become a bigger part of the proposition in the next sort of 6 months or so?
I mean, if I just run through that. Look, I think we would recognize. And if you look at our commentary over the last 3 years, I think we have consistently said over the last 3 years that we do not expect our growth to come from an increased rate of sale. And over the last 3 years, we have seen an increasing rate of sale. So I think we have to recognize that compared to where we were in say '19, that the rates of sale have far outstripped what we would have expected. Now it's difficult for me to say annually, do we think that the right position is 0.65 or the right position is 0.7 per annum. And we could probably have a bit of a debate around that. But the reality is, we've just traded 5 weeks at 0.48. So the point is that our sales are -- our reservations are unusually low levels. And we would certainly expect the business to be trading at something 0.6, 0.6 plus. In terms of what we do, we do believe that we have got a very, very strong sales team. I think we have recognition in the industry that our sales team is very strong. And therefore, we are continually going through a process with our sales team of looking at how we're presenting our sites, looking at mystery shopping on our sites, and making sure that everything is in great shape for when the customer arrives. Price is always going to be the last resort. You've got to ensure that everything else is right before you go to price. Price can be an easy option. But inevitably, as I touched on earlier, we will see 2 more pricing offers coming into the marketplace in terms of incentives. With regard to PX, I think PX is a fundamental part of our trading model as housebuilders. The reality is that our biggest competitor is the secondhand market. I mean the vast majority of transactions take place in the secondhand market. And therefore, PX allows us to provide a much smoother experience to the consumer in terms of being able to buy the secondhand property and allow the consumers to buy our properties. And I think that we recognize that PX has dropped off dramatically. But there's been 2 big drivers of that in terms of PX dropping off. One has been a very, very strong secondhand market, where the consumer feels that they can handle the sale and perhaps get better pricing on the sale. And secondly, that you cannot combine PX with Help to Buy. And therefore, the PX offer has been less attractive because you're not able to combine it. So in any event, even if the market conditions were stronger with PX finishing at the end of October -- sorry the Help to Buy finishing at the end of October, we would expect the PX offers to increase as we go forward.
The next question comes from William Jones of Redburn.
Just a couple for me. Slightly rounded, I suppose. The first one was just your customers. What percentage would you say are mortgage reliant as opposed to cash buyers, please, if you have that number? And then the second one was just around your gross margins across the land bank, let's just say, it starts at 23% or 24%. Would you have any idea of the spread of those sites from kind of top to bottom as a range. And then the last one, maybe if I could, was just about how you're thinking about the sites that are further out. Is that something you'd be maybe holding back on a bit in the near term? Or would you be planning to carry on with investment there?
Will, so I think maybe I'll start on these, and then what I'll do is just pass over to Steven to talk a little bit more about work in progress and kind of the process that we go through in terms of work in progress. I think a particular point that Steven will pick up there will probably be on Part L and the position there. But I mean, first of all, in terms of customers and mortgage dependency, I mean broadly, we would have less dependency on mortgages through the David Wilson brand and less dependency on mortgages through Barratt London. Barratt London clearly having a higher percentage of overseas customers and David Wilson having more second or third time movers who may have a substantial equity within their properties. But I think if you look at it in the round, it will be 80%, 85% plus in terms of mortgage reliance. In terms of gross margin, I mean, a sense where that's going well. But I mean, the reality is we're going to have a very wide range of gross margins in the sites ranging from margins that will be in the 40s down to margins that will be a single figure. In the overall scheme of things, you can see that the margins that we're reporting our gross margins for our last reported period, I think we're at 25%. So in terms of starting to look at what happens to house prices and potential impairment, my sense is that we have a lot of insulation on that. But there will be outliers unquestionably. If we've got to say that has a very low margin, if house prices fall 5% or 10%, then that site would be subject to impairment. But I think it would be a very, very different position from the position that we faced or the industry faced in 2008. In terms of work in progress, before I pass it over to Steven, I would say that the overall principle is that our work in progress is very tightly controlled and we're looking at sales against build on a site by site basis. Steven, do you want to talk about...
Yes, just a tad a bit on that, David. Yes, in terms of WIP, as David alluded to that, our WIP is released on a site by site and in fact plot by plot basis relative to sales achievement. We don't have a lot of excessive work in progress at the moment. In fact, it would be good to see further WIP come through, because it will help sales where we have a product where we can get people into their homes relatively quickly. Currently, vast majority of our sites, if you want to buy a house, you're looking like 5, 6 months away. In terms of other things, we've got a good level of productivity contracts, as David mentioned in the announcement there. We've got good headcount, again towards 20,000 trades in our sites and clearly keen to maintain that momentum. But one of the big challenges we've got in the next 9 months is with Part L coming into place in June '23 on our existing sites. Those sites that don't have foundations in by that point in time will be subject to a further increase in building regulations, which will add around about GBP 3,000 to GBP 4,000 cost on each unit. So we've got a lot of build to maintain and foundations to install over the next 9 months to achieve that objective. Hopefully, that helps.
The next question comes from the line of Glynis Johnson of Jefferies.
I still have 4, apologies. The first one just in terms of the land market. Forgive me, just to be clear, the caution on the land market, is it coming because the land market is still competitive? Or is it coming because nerves about what you're seeing ahead? The second question if I can do is actually about that land. You talked about the hurdle rate. I wonder if you can talk about the assumptions you're making in terms of price, build cost contingency. How are you reflecting the increased risk of what you might see in the next 12, 24, 36 months? The third question is in terms of leads. I'm interested to understand maybe why you think they're up? And are those leads related to specific homes or sites? Is there any kind of qualification the customer needs before that lead is registered? And then the last one, just to get you to repeat, I think, what the policy is in terms of capital allocation? You told us the share buyback will continue. But just in terms of your dividend, how should we be thinking about that given the current context?
So I think Mike will pick up in terms of capital allocation. And if I talk through and maybe Steven can also talk in terms of the land market. But if I just start off in terms of land market, as we've touched on multiple times, and we updated the market 5 weeks ago. And 5 weeks ago, we were very clear that our land intake was lower than we would have expected. And we adjusted our guidance to say that we would be on a replacement rate coming off guidance that we would be up 20,000 plots. So what we're saying this morning is that we will be significantly below replacement rate. And I think there's 2 factors there. I think the first factor is that we're simply not getting deals agreed, we were not getting deals agreed at a rate which would allow us to achieve replacement. And the second factor is that, as we've touched on, obviously, within the statement this morning, is that what we've seen in terms of reservation trends, particularly in the last 3 weeks, but let's say, overall in the last 5 weeks, it's just so materially below anyone buying assumptions that we feel that we need to kind of pause and assess. And that's clearly across the market. I mean, I don't think anyone will be seeing anything greatly different from what we are seeing across the market. In terms of our hurdle rates and the buildup, I mean, there's always a lot of different assumptions that go in. But broadly, we are putting in a rate of sale assumption based on existing trends. It's very unusual for us to buy a site where we don't have a normal site within a relatively short drive distance. And therefore, we have current rate of sale trends, and we have current or competitor pricing trends. I mean, whether we're using experience data or whether we're using right move and so on, we can also benchmark current prices. And as we've said, prices have held reasonably firm. In terms of build costs, I mean, we are updating build costs on a week-to-week basis. So our systems will give us build cost powerhouse on a week-to-week basis, and therefore, we're taking current build costs and feeding that in. But we're not feeding in assumptions regarding improving selling prices or assumptions regarding increasing build cost. I mean, we're working on current costs. And then contingency, and I'm not going to go into the ins and outs of it, but we've have a very, very standard contingency model over the last certainly 10 or 15 years where each cost component has a percentage set aside for contingency, and that's just something that we just simply don't vary. And it's something that's stood us in pretty good stead. I mean, yes, you'll get some ups and you'll get some downs. But over the piece, I think our contingency model is pretty reliable. In terms of leads, I mean, it's an interesting one, because I think we're clear on it is that we're getting leads, but they're obviously not converting. So I've never been big on reporting kind of, let's say, slightly peripheral numbers, because ultimately it comes down to what is the net reservation performance. But what I would say is that when you look at customer interest, inquiries coming across through our website or indirectly to us through other websites such as Rightmove and so on. I mean the leads are off the scale high compared to what we would have seen in 2020. So i.e., in a more normal trading period, we're way up against those levels of leads, and that's been well documented by Zoopla, Rightmove, et cetera. But the reality is, we're not getting the conversion into visits to site or ultimately into net reservations. But nonetheless, I think customer interest in housing is very, very high.
And Glynis, if I just pick up on capital allocation then. So we're not announcing any changes to the current policy, which we set out with the half year results. So on the dividend, we're progressively reducing cover. So we'll be at 2x cover for this year and 1.75x for next. We announced the share buyback a few weeks ago and we're committed to that. We're nearly through the first tranche of it, as David said earlier. And then just stepping back more broadly, the operating framework that we've set out quite consistently targets that we have zero surplus cash after we've accounted for land creditors. So again, we're not sort of changing that in terms of the operating model. And the only other thing I'd say on capital allocation is clearly the Board reviews that regularly to make sure that we're comfortable with it. So no changes in that being announced today.
And then just to supplement the land, Glynis. In terms of -- as David said, what we're finding, competition remains very elevated. It still remains highly competitive, a lot of bids going in on sites. We've become increasingly selective in terms of making sure we're focused on the primary locations. We're applying robustly our minimum hurdle rates. And as David mentioned, all our bids are based on very, very latest costs, which factor into the latest build cost inflations and have the latest revenue expectations. And as a result, our net approvals are down, as we sort of expect levels to be substantially lower than replacement levels. We've seen, in some cases, some of the RSL operators have more recently come back into the market and that's sort of fueling some of the bids taking place. But that's basically we are at.
Thanks. Thanks, Steven. Thanks, Mike. Thank you, Glynis.
The next question comes from the line of Gregor Kuglitsch of UBS.
So I guess I'll just have one left. And I guess it's around government policy. I just wanted to kind of get a sense what you're picking up just in all sorts of stuff flying around in terms of, I think, investment zones. I heard yesterday about something around sort of perhaps relaxing planning at some of the smaller sites or Section 106 requirement. So I guess the question to you is, what are you picking up? What do you think is sort of potentially coming down the pipe to perhaps help out a little bit?
Greg, thank you. I think it's obviously relatively early days. We clearly have a new Secretary of State in Simon Clarke and a new Housing Minister in Lee Rowley. I've attended a couple of meetings with Lee Rowley and I think he's been very, very clear that we need to build more homes. I understand there's a debate about should we have top down targets or should we have bottom up targets and so on. But I don't think there is any doubt in the government's mind that we need to build more houses. One, because if you look at our housing supply over the last 40 years, clearly, the housing supply has been way short of any targets, top down or bottom up. And secondly, because the reality is, housing is a big, big driver of growth. And therefore, if the housing market is buoyant and we're building new houses, the economic multiplier effect is very, very strong. So I think we are getting a very clear message that more houses need to be delivered. And Lee Rowley has said that very directly in public audiences. The investment zones is a very new policy and it's clearly going to take time to settle. And I think realistically, investment zones are not going to have any significant impact on the market in the next 12 to 18 months. So the reality is that we're very much going to be dealing with the current backdrop absent investment zones over that time period.
The next question comes from the line of Clyde Lewis of Peel Hunt.
I've got a couple left I think. One, just going back to labor costs and rather your direct labor, David, but just thinking around sort of the subs and whether you've started to see them "more competitively", I suppose, is the way to ask it? And the second one was around whether you've seen any change in behavior from the HAs or the RSPs at all in terms of sort of how they are approaching new schemes that might be coming through?
Okay. Clyde, I mean if I sort of start on labor costs and then pass over to Steven. So I think we've said fairly consistently, when you look at the inflation mix, we have seen more of the inflation pressure coming from materials that we have on labor. And Steven has talked previously about the sort of levels of labor that we have on site and how that compares over the years. In overall terms, you've got to assume that with less activity that we will see less pressure in terms of labor cost would be my sense. In terms of the HAs, again, Steven touched on it briefly. I mean we probably see much more of the HAs in terms of the land market, and that's been a feature perhaps over the last 6 months or so. In terms of the affordable housing, we've not seen any change. But I mean I think the reality is that if the market is softening, then inevitably, the HAs will start looking at pricing and start looking at appetite in terms of 106.
Yes. In terms of labor, in terms of the site labor, we've got adequate levels. We've got all the people on site we need to deal with our construction programs. Very much as I said probably 4 or 5 weeks ago. One of the things we've actually seen in the last sort of 2, 3 months is in terms of the groundworker trades, where we've seen sort of easing in terms of groundworkers and they've been keen to secure longer-term work and that's being reflected in their pricing. But otherwise, the joiners and bricklayers remain around the solid same levels, electricians and plumbers, et cetera. So we are about the same as where we were 4 or 5 weeks ago, adequate resources available. And the pressure on build cost has been around materials.
The next question comes from the line of Alastair Stewart of Shore Capital.
Two questions. I think my first question pretty much covers the ground that various other speakers have referred to, but it is more focused on what are you hearing from your potential customers, the ones that had expressed an interest? Are they sitting on their hands? Are they just -- are they exiting the market altogether? Are they holding back for maybe a better offer? So that's really just anecdotal stuff if you have it. And the second question is, Capital Economics is predicting a 40% fall in build starts next year, housing starts. Looking at the wider industry, not just you, what would have to happen to see that level of decline in starts?
Alastair, so if I take customers, and obviously, you said it yourself, I mean, I think it's slightly anecdotal. But I think that when you look at our customers, they are really falling into 3 categories. So customers who are first-time buyers living at home, first-time buyers who are renting or in some sort of house share arrangement, and then second time buyers. So what I've said and certainly said in September is that I think that the challenges for us in the marketplace in terms of getting customers to transact, there are 2 big areas of challenge. I don't believe that interest rates per se is a primary problem. But I would accept that a sudden change in interest rates is very disruptive for the market, which is clearly what we've seen. I think the primary drivers that stop transactions are: one, where people perceive that house prices are going to fall. And you can see a lot of commentary around the market now saying that house prices are going to fall. It's not what we have seen to date. But nonetheless, I can see the commentary and I can understand the kind of feeling. And then the second thing is concern about job losses. And whilst we're in a position where the market is incredibly strong in relation to employment, that doesn't mean to say that people don't have concerns about job losses. And those to me, if you look over history, have been the 2 main reasons as to why people will not transact. So therefore, anecdotally, we're hearing people saying, well, no, they just won't go ahead just now. And we've also, over the last 5 weeks, seen people where they have got what they believe is a likelihood of a mortgage at a sensible rate and that likelihood has evaporated over a short period. Now we said that the market appears to have stabilized a bit over the last week or so. So it may well be that some of those customers are able to reestablish mortgages at competitive rates and that will allow them to move ahead and transact. I think we have to recognize for consumers that when you look at the rental market, rentals are rising rapidly. And therefore, whilst mortgage interest rates are rising, it can well be the situation that buying is still more attractive. In terms of capital economics, I think that build starts is clearly going to be driven from planning. So a drop off in relation to initially land transactions, whether it be on a subject to planning basis or whether it be land with planning. So my sense is that, that isn't going to kick in quickly. That's not something that's going to kick in from the first of January 2023. So therefore, for starts to fall by 40% in 2023 sounds to me a little improbable. But clearly, starts could fall by 40%, but there's going to have to be a longer lead time. And you would see it far more clearly in the planning numbers. So the planning numbers are unquestionably down, but they're not down by that order of magnitude. And I think it's unlikely that if people have a planning consent that they will effectively mothball the site and not commence. I mean, unless there are extraordinary changes that take place from here. Thank you, Alastair.
The last question comes from the line of Andy Murphy of Edison Group.
I had a few, but been lost in the queue. I have been answered apart from this one about sort of corporate activity in this sector. I was just wondering, given the very low valuations now across the sector, what your thoughts were about potentially Barratt being involved in any sort of corporate activity or whether you can see others being the focus of other people's attention in that sector?
Andy, look, I think we've been pretty consistent in terms of our view of us being involved, in terms of us initiating. We're very pleased that we've got 3 strong brands, so Barratt London, Barratt Homes, and David Wilson Homes. And we've consistently said that we don't feel that we need to acquire another brand. We believe that our strategic land business in any event is a strong business, clearly emanating originally from the Wilson Bowden acquisition. And we strengthened that, in our view, substantially through the acquisition of Gladman back in January. So from our perspective, we are not in the business in terms of looking at other assets. And in terms of other companies or entities looking at the sector, we're obviously very aware of that and we just keep that position under review. But we recognize that sector valuations given clearly what was very recently an extremely strong backdrop, arguably the strongest backdrop that we've seen. There's been a huge reversal in sector valuations, and therefore, we can see that people may see that as being attractive.
We do have one more question. That question comes from the line of Jonathan Bell of Deutsche Bank.
Just on your assertion of flat whole year and completions for the full year, I just wonder whether you could just comment on what sales rate you assume between now and the year-end. And then second one would be, have you any sense for how many recent reservations have been at 5% to 6% mortgage rates as opposed to perhaps lower rates that people were bringing forward. And then the final one is on cancellations, have you any feel for whether the increase you've seen is being driven by some buyers with variable rate mortgages. I know they're very low in the mix, but they do get hit immediately in terms of the economics.
Okay. So I'll pass over to Mike and Mike will just talk about assumptions. But I think when you look at the subject of mortgages and cancellations, I mean, bear in mind, John, that we don't get this first hand. We don't have that relationship with the customer. The customer has the relationship with a financial adviser. And therefore, all we will get will be a reason from the customer as to why they're not going to proceed and we won't get mortgage terms from the customer and so on. But I think the way that this has evolved is that we would have had a lot of customers in pipeline prior to the mini-budget who had a mortgage approval to proceed. And therefore, those translations are much more likely to have arisen because they are concerned about outlook, or because their chain has collapsed rather than they've got the wrong mortgage rate. I think that's more -- given the relatively short time frame, that's much more likely to position. And therefore, customers in the mix just now with 5% or 6% mortgages will be relatively few and far between. But obviously, now that those are the new rates, and we've clearly got very high rates, for example, in 2-year fixed, then now if people don't want to proceed, then we will see that fitting in as those higher rates become active in the market.
And Jon, just picking up from the sales rate point then. So I don't want to get into giving specifics on exactly how we model it. But I think if you look at where we are today, we're 64% forward sold on our private sales for the year. And within that, almost 3/4 have already completed or are exchanged. So we have a high degree of confidence around those. What we're assuming from here is that we see essentially a normal trading pattern from our current trading levels. So a slightly stronger spring selling season, as you would normally expect, and how that translates through into rates, as if you were modeling at a sort of mid to high 0.5s through that stronger selling season, and that's the way we're looking at it at the moment. But clearly, the market is dynamic and we'll have to keep that under review as we go forward.
There are no further questions.
Okay. Thank you very much, and thank you, everyone, for dialing in.
Thank you for joining today's call. You may now disconnect.
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