(Bloomberg) -- Higher interest rates have caused off-plan home sales to tumble in the UK, prompting the nation’s housebuilders to scale back development.

Some 32% of new homes were sold before they were built in England and Wales last year, down from 39% in 2022 and the lowest level in ten years, according to Hamptons International. That’s bad news for developers, which have been slowing build rates to preserve capital and ensure they’re not left with large numbers of unsold homes, the broker said.

“With more homes only sold after they’re finished, it means developers are borrowing money for longer and at higher interest rates,” said David Fell, lead analyst at Hamptons. “This means the government is unlikely to get close to hitting its housebuilding targets until interest rates drop back considerably.”

Read more: UK Mortgage Arrears Rise as Borrowing Rates Squeeze Homeowners

Off-plan sales are essential for developers’ cash flow, bringing money into the business before units are complete and allowing them to borrow money to fund more construction. The share of new homes sold off-plan peaked at 47% in 2016, but a surge in mortgage rates and cost-of-living pressures have squeezed buyers of new homes harder than most in the past 18 months.

In London, fewer than half of new homes were sold before being built last year – the first time off-plan deals have fallen below 50% in the capital since 2012, the report said. Buy-to-let investors have made up a dwindling share of off-plan purchases over the past few years, as higher borrowing costs and tougher regulation push some landlords out of the market.

Flats were more likely to be sold off-plan than terraced houses for the first time since the pandemic in 2023, as pricey mortgages meant first-time buyers took smaller steps up the housing ladder. Just 22% of detached homes and 31% of semi-detached homes were sold off-plan last year, an eight and ten percentage point drop respectively from 2022.

Read more: UK Builder Vistry Notes More Signs of Recovery in Housing Market

Still, the nation’s biggest homebuilders have noted signs of recovery in the housing market so far this year. Vistry Group Plc reported an uptick in its average weekly private sales rate earlier this month, following a similar optimistic tone struck by rival Persimmon Plc in April.

But in Hamptons’ view, the smaller share of off-plan sales is likely to continue until borrowing costs come down. The Bank of England’s interest rate remains at 5.25%, the highest since before the financial crisis. 

“In a world of low-interest rates, incentives that cut the size of the deposit were the magic bullet to help buyers into homeownership,” Hamptons’ Fell said. However, higher mortgage rates “have pushed buyers towards smaller, more affordable homes that are often second-hand,” he added.

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