Housebuilders 'in denial' as new-home prices rise and buyers stay away

Housebuilders are still increasing prices despite complaining of falling sales and seeking government aid.

The Halifax house price index showed new homes in July cost 1.1 per cent more than a year earlier, even though prices across the whole market had fallen by 10.9 per cent.

One London estate agent said: "The developers are in denial. They think the fall in the housing market doesn't apply to them."

Builders are providing many other incentives to purchasers but remain reluctant to cut prices. They are offering to pay stamp duty as well as legal and survey charges and loan fees, and they will waive the demand for mortgage deposits.

And even before Gordon Brown announced a similar scheme last week, many builders, including Crest Nicholson, were offering interest-free loans for five years on a quarter of the price for people buying new homes. Taylor Wimpey had extended that offer to 10 years on some sites.

Estate agents compare that to the car manufacturers' cash-back offers and say it is simply a way of inflating prices. They claim the value of new homes has fallen further and faster than the rest of the market.

The news follows the Government's £1.6bn package of measures to prop up the housing market last week, which included a holiday on stamp duty for first-time buyers. But most housing experts said the measures were feeble, arguing that allowing houses prices to fall further was the best option. Brand new flats in many provincial city-centre developments are being offered at around 40 per cent of the original selling price by buyers who bought to let and then changed their minds.

Several reasons are cited for builders refusing to cut prices. Besides not wanting to upset those who have already bought properties in the same block or on the same estate at higher prices, they want to deter people from cancelling agreed sales when they see prices falling. Barratt Developments has reported a 34 per cent increase in cancellations in the first half of this year.

Nor do builders want to set a precedent that would mean having to sell remaining homes in the development at lower prices – even though agents believe there must be cuts to achieve further sales. City analysts also fear builders are deliberately keeping prices high, while using other sales incentives, to avoid deeper writeoffs that could hit profits or put them in breach of banking covenants.

But the reluctance to reduce prices in line with the rest of the market means developers' sales have halved since last year, with homes standing empty and a sharp cut in new starts that will bring down production to the lowest level since the War. John Stewart of the Home Builders Federation admitted: "There are quite a lot of completions out there that are not sold."

Construction started on just 5,305 new homes in July – a new low that was 57 per cent down on a year earlier. Some 20,000 homes a month must be built to meet government targets.

Chief executives of the big housebuilders last week discussed prices but justified their reluctance to cut in line with the market by saying the cost of new homes had risen less quickly during the boom.

In fact new home prices are still 35 per cent higher than five years ago, whereas the gain on existing properties has fallen to 27 per cent. New home prices are ahead over 10 years too, according to the Halifax.

But despite their unwillingness to cut selling prices, builders have lobbied the Government for help. However, with builders already paying buyers' stamp duty as well as offering interest-free loans, those parts of last week's government package are unlikely to generate more sales, though they will boost profits by transferring the cost to the state.