British housebuilder Barratt on Wednesday agreed to buy competitor Redrow for £2.5 billion ($3.2 billion), sending share prices gyrating as investors mulled the outlook for the nation's faltering property market.

"The boards of Barratt and Redrow are pleased to announce that they have reached agreement on the terms of a recommended all-share offer," the pair said in a statement to the London Stock Exchange.

Barratt would own 67.2 percent of the new group and Redrow the remainder.

In reaction, Barratt's share price sank seven percent but Redrow stock surged 13 percent.

The news comes with the UK housing market hit by sharply higher interest rates -- which ramp up home loan costs -- and a souring economic climate amid a drawnout cost-of-living crisis as inflation remains elevated.

"The economic winds have not been kind to the housebuilders and Barratt... and Redrow clearly believe they'll be stronger together," said Susannah Streeter, head of money and markets at stockbroker Hargreaves Lansdown.

The new group, which will be named Barratt Redrow, will seek to generate annual cost savings of £90 million per year.

"This is an exciting opportunity to bring together two highly complementary companies, creating an exceptional homebuilder in terms of quality, service and sustainability, able to build more of the high-quality homes this country needs," Barratt chief executive David Thomas said in the statement.

"The combined group would leverage the respective strengths of both Barratt and Redrow, delivering significant benefits to our people, our supply chains, and -- most importantly -- our customers."

Finding an affordable and green way to build tens of thousands of new UK houses to meet demand is set to feature among key policies outlined by the ruling Conservative party and main opposition Labour in the run-up to a general election expected this year.