The Impact of Brexit on Property…
Since Brexit became UK government policy following the referendum in 2016, the effects on house prices have been largely overstated. Prices have not collapsed, instead they have dropped slightly, stabilised and in some areas, particularly outside of London, recovered well. The transactional process in residential property sales has been significantly slower however – people are holding off buying a house, and sellers are holding on to achieve what they perceive to be a fair price. The days of easy wins due to house price inflation are gone, but conversely there is less threat of a house price collapse. The cyclical nature of our boom-or-bust economy appears to be diminishing as we stabilise upon more prudent economic management aimed towards long-term sustainability.
The lasting long-term effects of Brexit remain unknown, and short-term uncertainty is acute. The UK is meant to leave the EU on 29th March, but Theresa May is going to have to ask the EU for an extension irrespective of whether or not her deal passes the meaningful vote. What conditions will the EU put on an extension? Every member state has to agree to an extension: failing that, the UK will leave the EU on 29 March, with or without a deal. If May’s deal does pass the meaningful vote, the EU will almost certainly grant the UK a short extension for the purpose of ratifying the withdrawal agreement. However the more difficult question will arise if May’s deal doesn’t pass – then what would be the purpose of an extension? The length of any possible extension the EU may grant will determine whether there is enough time to try any of three options: forge a soft Brexit consensus in parliament, call a general election or call another referendum. If the EU grants the UK a long extension there is time for all of these things, if the EU grants only a short extension there isn’t. So the conclusion is, Brexit is still very much up in the air. It is very difficult to predict the long-term impact Brexit will have on property, because still nearly 3 years on from the initial 2016 referendum, we do not know what form Brexit will take.
Jeremy Duncombe, Director at Legal & General Mortgage Club encapsulates the uncertainty surrounding Brexit: “The impact of Brexit on Britain’s housing sector will largely depend on the actual outcome of the negotiations with the EU”. Duncombe reiterates the precarious position the UK finds itself in. Uncertainty cannot be quelled; Michel Barnier the EU’s chief Brexit negotiator stated that “nothing is agreed until everything is agreed”.
The UK government’s assessment of the economic impact of Brexit was recently published by the House of Commons Brexit Committee. The analysis stipulated that on both regional and national levels, there will be adverse effects on the economy. A PwC report suggests that total UK GDP in 2030 would be around 1.2 – 3.5% lower than if we remain in the EU, depending on the nature of the UK’s final agreement with the EU. The long-term effects of Brexit upon property appear bleak.
But… why should people stop moving house just because the UK is no longer in the EU? There is an overwhelming demand for property, and a well-known “Housing Crisis” predicated on a shortfall of available property – particularly to first-time buyers. Housebuilders have performed remarkably well since 2016, and it appears possible that they will continue to do so. The structure of Berkeley, Barratt, Persimmon and Taylor Wimpey are very different to what they were during the 2008-09 recession. Large housebuilders are light on debt, own a significant amount of land and continue to benefit from government subsidies provided in the form of Help-to-Buy, which has another three years to run. The stock value of Taylor Wimpey, Barratt and several others collapsed by 30% following the initial referendum result in 2016 – but the results published so far for 2019 show a 15% increase in profit. It is possible that these successes will be short-lived however with the falling value of Sterling against international currency, making the raw materials required for construction more expensive. Housebuilders are unlikely to allow these increased costs to affect their profitability, so expect to see increased new home prices in the forthcoming years. Furthermore there has been significantly less EU migration to the UK, and this skilled labour is essential to the building & construction industries. With less available labour comes increased competition between employers, to secure employees. “Brickies” will continue to see increasing wages, again likely to be reflected in increasing new home prices for buyers. The future direction of UK immigration policy is unclear, making it impossible to predict with any level of certainty what the effects of future EU and non-EU migration post-Brexit will have on housebuilding and construction.
The Halifax index showed a fall in house prices of 2.9%, followed by a 2.2% rise. Hamptons suggested that 17% of homes sold in Q4 2018 achieved above their asking price, in line with the average over the past decade. The Private Rented Sector (PRS) in London has risen from 14% of households in 1991 to 30% in 2016/17. Furthermore, JLL reported that London was the top city for global commercial real estate in 2017, with total investment up 35% from 2016. Commercial London real estate remains to be viewed as a safe long-term investment, particularly with foreign investors from the Far East. These statistics go to show that despite appalling uncertainty, Brexit has not yet had a major negative impact on property.
However the prime residential London market has been the worst affected by Brexit, so far. Prices have fallen 5.7% through 2018, with 56% of listed properties being previously for sale at a higher price. It is likely that Brexit and the resulting uncertainty has contributed to this, but the likelier cause was George Osborne’s decision to raise stamp duty in December 2014. This has successfully reduced the number of overseas buyers of prime central London real estate leading to £1.9billion in foregone Treasury tax revenues.
Since the referendum in 2016, the UK property market has remained resilient, and in all likelihood will continue to do so until a final Brexit agreement is reached. Uncertainty is rife, and it’s anyone’s guess how Brexit will eventually play out. Chesterton’s recently published an excellent paper on the impact of Brexit, and summarise the current state of affairs perfectly: “The bottom line is that nobody knows what will happen after the UK leaves the EU. There is clearly risk to both the property market and the wider economy”.
Written by Daniel Robinson on the 7th February, 2019