Bovis Homes revealed the impact of last year's weak housing market as it posted a 20 per cent slump in annual profits.

The company said 2005 was "the most competitive and challenging period the housing market has seen for many years" as pretax profits fell from £144.8 million in 2004 to £116.1 million.

But Bovis said it started 2006 with a strong order book and predicted house prices would increase "modestly" having seen them fall from £197,900 to £175,500 last year.

In its central region, which includes the West Midlands, the group sold 31 houses less in 2005 (500) than in 2004 (531), with average price dipping from £213,900 to £179,000.

Operating margins slipped from more than 27 per cent in 2004 to 24 per cent last year as the Kent-based group moved towards smaller and cheaper homes.

Total house sales were flat at 2,702 but revenues dipped from £559.5 million in 2004 to £521.2 million as the number of one and two bedroom homes bought rose from 418 to 602 but the number of more expensive four and five bedroom properties fell.

It came as the housing market weakened from its boom of 2004 which saw Bovis and a number of other house-builders bank record profits.

Bovis said trading was slow in the first half of 2005 follow-ing a string of interest rate increases, but picked up after the Bank of England cut the cost of borrowing to 4.5 per cent in August.

Chairman Tim MelvilleRoss said: "The 2005 calendar year represented the most competitive and challenging period the housing market has seen for many years.

"Activity in the housing market depends to a great extent on consumer confidence. Whilst affordability continued to be good through-out 2005, consumers demonstrated caution in making significant purchasing decisions."

Bovis forecast a stronger performance in 2006. It has already secured 1,368 reservations for legal completion this year.

Mr Melville-Ross said: "The range of homes currently being built on the group's sites is ideal for targeting a wide cross-section of home buyers.

"This should enable the group to increase its volume of legal completions in the prevailing competitive marketplace."

Mr Melville-Ross predicted house prices would increase modestly, at a rate likely to be lower than earnings growth.

Bovis increased its dividend from 20p to 25p and added that it expected the payment to shareholders to reach 40p a share by 2008.

Bovis, which specialises in mid-market suburban and commuter-belt housing, is the latest of a series of builders talking of a recovery in the housing market, although it also forecast lower profit margins due to rising costs.

"Currently the market is steady and total volume is up 17 per cent to March 10 and we believe we can achieve our volume prediction this year as long as market stays broadly as it is," said Bovis chief executive Malcolm Harris.

Bridgewell Securities said in a note: "Bovis has ended the year with stronger forward sales, a favourable product mix and an increase in land holdings and accordingly we remain overweight on the company."