What will Brexit mean for UK residential property?

The housing market has stagnated over the past year, but opinion is divided on whether or not it is because of Brexit. 

One headline said it all: ‘Brexit is now the single biggest wor­ry for the property industry’. A mid-June survey of owner-occupiers, landlords, property investors and insolvency prac­titioners by auctioneers John Pye Property found that 38 per cent identify uncertainty around Brexit as the biggest challenge affecting the property sec­tor, with other factors including higher taxation and stricter bank lending trailing behind.

It would be hard to argue against that sentiment: in the last few months, the impact of Brexit on the UK’s residential property sector has become some­thing of an obsession among estate agents, lenders and investors. Even the Open University produced an article asking whether Brexit and a decline in EU immigration will ease the housing crisis.

No simple answers

As with anything to do with Brexit, there are, of course, no simple answers – primarily because the outcome of the negotiations for the UK to leave the EU remains so uncertain. The historic picture – what has happened to the UK housing market since the referendum in 2016 – does yield some tangible facts, however.

First, house prices have risen on average since June 2016, but at a slower rate than over the two years before. Data from the Land Registry, for ex­ample, show that in June 2016, the average price of a residential property in the UK was £212,887; by April 2018 the corresponding figure was £226,906 – a rise of 6.6 per cent. (Consumer price inflation over the same period is 5.6 per cent, so that means on average, house prices have risen by 1 per cent in real terms since the decision to leave the EU.)

In the equivalent period before the referendum, prices rose by 10.9 per cent before adjusting for in­flation, so you could argue that, while Brexit has so far not been a disaster for the property market, it has ushered in a period of lower growth.

Secondly, there are clear signs that in recent months the market has been stalling. The Halifax House Price index shows that average prices ac­tually fell marginally from April through June on a quarterly basis – which gives the clearest indi­cator of overall trends – albeit June saw a modest increase of 0.3 per cent month-on-month. That follows quarterly inflation of over 2 per cent last autumn. Nationwide data show annual price in­flation falling to a five-year low in June, declining quite steadily from 5.1 per cent in June 2016 to 2.0 per cent in June 2018. And the Rics Residential Market survey in June showed a narrow major­ity (2 per cent) of members reporting prices rising over those reporting prices falling. RICS sees this as ‘indicative of the flattish picture persisting in the near term’.

The third simple fact is that London has been sinking while other regions have been rising. Nationwide data shows that in the first quarter, London was the only region whose price index had fallen over 12 months. In May the Office for National Statistics revealed that prices in London were falling for the first time since 2009.

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Prices are rising fastest in a series of region­al cities, according to Hometrack. Its UK Cities House Price index published in February shows the top performer over five years is Bristol, but Manchester, Edinburgh and Leicester are current­ly leading the pack with year-on-year rises above 7 per cent. The Midlands and Scotland come out of other surveys as the strongest regions currently.

But the story of the UK residential market is not just about prices. Transaction levels have plum­meted, according to LSL Property Services, owner of estate agents Your Move and Reed Rains, which said that the number of sales was 25 per cent down in April. And Rics’ June survey of its members showed that for the 16th successive month more members reported falls in the number of new sales down than reported rises, though there was a small majority reporting an increase in new instructions.

Simon Rubinsohn, Rics chief economist, says: ‘Although agents are suggesting that a little more supply may have come onto the market in May, some of it from the buy-to-let sector, inventory levels still remain near historic lows.’ In London, however, there is plenty for sale – especially at the top end of the market –_ but very few buyers.

Whether Brexit uncertainty is putting off people from moving is a moot point, but estate agent and commentator Henry Pryor says he expects the market to ‘stiffen’ later this year and early next ahead of our exit from the EU. ‘How many people are going to make their most expensive purchase ahead of Brexit and not feel they would be better to put it off until June?’ says Pryor.

Brexit impact debate

The impact of Brexit on the market is nevertheless a source of debate. When Reuters polled 30 property experts on the outlook for prices, more than half said they expected reduced demand in London over the next year because of Brexit. Oliver Knight, associate at Knight Frank, says: ‘There is a lot of uncertainty in the market as to where we are with Brexit negotiations. That has really kept a lid on further growth. There is a wait-and-see attitude.’

Meanwhile, Chestertons, in its Brexit Impact paper, says: ‘In the owner occupier sector, a number of purchase decisions have been put on hold with Brexit concerns given as the reason, although it is difficult to say definitively whether this was the sole or even real reason.’

But Trevor Abrahmsohn, the self-styled ‘Bishops Avenue estate agent’ whose company Glentree Estates sells properties to the rich and famous in Hampstead, believes Brexit is a red herring. ‘Even intelligent observers of the residential property market, particularly in London, are being fooled into believing that Brexit is responsible for the slump in activity, when the cognoscenti know full well that it is all down to the fallout from stamp duty,’ he says. He argues that, by lowering the value of sterling and making London property more attractive to overseas investors, Brexit has actually provided a stimulus to the market.

While the UK housing market is underpinned by the fundamental imbalance between supply and demand, other factors mean that – Brexit or no Brexit – the appetite to buy may be muted for a while yet.

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Recent research by Direct Line for Business found that of the 17 million people in the UK who rent, some 70 per cent or 12 million have no intention of buying in the near future. That may be a reaction to the lack of affordability in the housing market, but it’s also down to a generational change, says the insurer. ‘While price is a factor, many people are increasingly comfortable with the flexibility afforded by renting a property, rather than jumping into homeownership,’ says Christina Dimitrov, business manager at Direct Line for Business.

The outcome of the Brexit negotiations will, nevertheless, clearly have a significant effect on what happens next with residential property. In research carried out for fund manager Woodford at the end of 2017, Capital Economics explored three scenarios: ‘no deal’, a ‘compromise deal’ and a ‘trade boost’ scenario. It concluded that none of these would be disastrous for the housing market unless the economic shock was so severe it led to forced selling.

Chestertons also argues that it is the shape of the economy that will determine the outcome for UK property after Brexit, and concludes that after a period of turbulence, economic growth is likely to resume.

London is likely to experience any Brexit fallout more sharply than the rest of the country, Chesterton observes. ‘However, there is no sign to date that foreign property investors will suddenly desert either London or the UK post-Brexit. There is every reason to believe that the flow of overseas money will continue to increase.’

Comments

What will Brexit mean for UK residential property?

I think the area that will be hardest hit will be the Southeast and London. Mostly in the service industry, indeed my company is a mix of Manufacturing and service employs around a 1000 people, Our contingency model is based on a third losing here jobs most of which will be transferred back to the Continent the staff can follow if they want if they can get residency work permits etc. assume that 200 decide to up and leave with there families then that's 200 houses freed up to be rented or sold. Multiply this scenario out by what 10, 100 1000. That must have an impact on house availability and reduce prices as demand falls. It is like the steel and Mining industries closing in the 80's and 90's in the Midlands and North - this time it will be the South's turn I think more so than the North. The North has had to weather the bad times twice they have had to adapt - Now they are producing products that people need and factories are not easily replaced. The old Industries are gone we now have a more high Tech industry base.
Take a look Porter's Five forces apply it to the country and the particularly the service industries ask are you unique enough to still compete - can you overcome both Threats of new entry and Threat of substitution - My company "new entry" is a new service centre in Holland and Substitution is our Products/Service driven by cost change - Tariffs - exchange rates etc and or lack of markets if no easy customs route. These points are relevant to all the country but the South's exposure to Service industries makes substitutions threat greater - what makes them Unique enough for them to fend off the challenges coming up ??

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