The Property Market and Brexit

When the UK voted to leave the EU in 2016, there appeared to be little effect on the housing market. However, as the March 2019 deadline to leave approaches, estate agents feel that the ambiguity of the Brexit is causing ripples in the property market.

What the Data Shows

A Recent survey showed that in September, the price outlook for the next 12 months was quite low. The main reason for this outlook amongst buyers is the Brexit. The governor of the bank of England has already talked about this. He has put the exact figure of loss at about 35%.

However, it is worth noting that this is an extreme scenario. The eventual effect on prices will depend on the type of deal that is created and its effect on the economy. Thus far, some sections of the market have become quite affected by recent developments. This was after the Prime Minister was not able to come up with a deal in September during the Salzburg summit. Here are some of the factors that might affect sales and purchases decisions.

The Current Effect on the Brexit

Since the vote, the housing market in London and parts of the southeast have slowed down. In London, prices have fallen by 0.7 per cent by June. This was according to data from the Office of National Statistics. The transaction levels in capital, have dropped 20 per cent year on year.

The number of homes for sale that cost £2 million or more has dropped 25 per cent in the Q3 2018. This is according to data from LonRes, the property data firm. Across the nation, average prices have changed little and in fact, have risen. In the year upto June, they rose to 3 per cent. This rise was driven by regional markets. The prices for Scottish land were up by 4.8 per cent to hit an average of £150,000. In eastern England, the prices rose by 3.3 per cent to hit £292, 632.

Property market trends are driven by various factors. One of them is that there are fewer investors-buyers and the affordability is stretched in most expensive markets of the UK. The London and southeast markets are close to their limit on mortgage regulation. Right now, there is little capacity to stretch this loan-to-income ratio.

The concerns are aggravated by Brexit worries. This fear is higher in London than in the north since the financial commitment to buy in London is more. Besides that, Brexit will have a bigger impact on those living in London. The city is more closely linked to the EU and it could lead to job losses. This is as opposed to those outside London and the southeast.

EU Buyers

The uncertainty of Brexit was affecting EU buyers. Besides that, the weakening UK pound could also make the market more attractive to buyers from abroad.

The Effect on the Property Market as Brexit Approaches

Those in areas where prices are dropping have adopted a wait and see strategy instead of committing. However, analysts claim that for Brexit, the crucial moment will be when the union ends in March 2019.

If there is a reasonable deal created, the market will recover fast. However, if people hold back too long, it will be self-fulfilling policy. If there is no deal at all, markets in London and the surrounding areas will continue weakening.

An analyst from UBS noted that in other cycles when there was a downturn in London, it usually led to a decline in the larger property market. However, he noted that might not happen this time.

The Bank of England thinks this might not happen. This is because capital is more exposed than national markets to changes in stamp duty and will more likely be affected by the leaving of nationals from the EU.

The Effect on Mortgages

One positive effect of the Brexit has been that interest rates have fallen. The Brexit uncertainty is keeping mortgage rate low and the cost of home ownership has been quite low. The bank of England raised the base rate to 0.75 per cent from just 0.5 per cent. This is the second rise in the past 10 years. The Governor has indicated that this rate will continue increasing but at a low pace.

The current householders are increasingly locking in the existing mortgage rates for five-year fixed rate deal in anticipation of the rise. After the Brexit, the bank of England cut the rate to 0.25 per cent as part of the measures to prevent a recession.

However, if there is a disorderly Brexit, the Governor has said similar measures are not going to work. This will push up the mortgage cost, while the unemployment is rising. In the end, it might make mortgage lending riskier, which will cause a rise in rates.

The Long-Term Effect of Brexit on UK Property

Any transitional deal will have to go through a vote in parliament. If the agreement receives approval, the markets will have some reassurance. However, it might leave important details yet to be determined as part of a long-term arrangement with the EU.

Most estimates claim that the Brexit will have an impact on economic growth. An analyst at UBS has said that a soft Brexit will cut 6.9 per cent of the GDP in the next five years. A hard Brexit will lead to a 10 percent cut in the GDP.

Most of the effects would happen 12 to 18 months after the UK leaves the EU and trade barriers came into effect and businesses leave the UK. In its stress test, the Bank of England has said that banks will be able to support the economy even during a disorderly Brexit. This is because they have passed tests in a scenario worse than the financial crisis of 2008.

Analysts have said that the housing market will be quite robust for various reasons. This will include the Help to Buy scheme by the government. The scheme was boosting new-build home buyers.

The Rise or Drop of the Mortgage Lending

The analysis shows that there is no distress to the financial system. Thus, there is no reason to expect that there will be a sharp drop in the lending for mortgages. However, few people expect that there will be strong growth as was seen from 2011 to 2014.

In the long term, the effects will depend on migration patterns from the EU. Whether the patterns continue as they are or drop 20 per cent after Brexit. In 2019, the prices are expected to drop.

Property Prices and Politics

During the Brexit campaigns, housing prices played an important role. George Osborne, who was for remain, warned that prices might drop 18 per cent two years after Brexit. He said that this would be caused by falling foreign demand and the economic shock.

For those supporting leave, they said dropping prices would allow young people, currently giving almost half of their income to property owners, a chance to buy. While no one is sure what Brexit means for the property market, everyone is sure it means uncertainty.

The three Ds

What is happening is that buyers are putting off any buying plans to understand what will happen. However, if there is no deal, supply will be driven by death, divorce, and debts, the three Ds. These all lead to sales. However, how many people will want to buy?

In Q1 next year, there will be few deals done at lower prices to get buyers to buy. All of this will mean that Brexit will cast a shadow on property in the UK. It is most likely that prices will be lower by five per cent but not the worst-case scenario of 35 per cent.

A Slight Slow Down

It is important to be clear that the chances of a crash are quite low but the market will slow down. For instance, in 2017, the prices of homes in London fell by about £5000. While it is easy to talk about the housing market in broad brushes, it often depends on where you live.

Thus, while prices will drop by one per cent or five per cent in London, they might rise six per cent in the Midlands and Scotland. However, if unemployment rises and interest rates go up, you might see sellers being forced to come to the market. This might then lead to a collapse of the housing market.

Most analysis shows that the outcome for the property world in the coming years will be mildly negative or neutral. In fact, some analysts expect that prices could rise one year and all the next years at between 5 to one per cent, depending on other government policies. However, this mainly depends on interest rates staying low. However, there is still a low chance of the market collapsing as it did in the 90s. When it did, some of the prices in southeast England did slide by almost 35 per cent.

What Caused the 90s Market Crash

In the 90s, the economy experienced a boom and property prices spiked. The spike took place just before the MIRAS (mortgage interest relief at source) was removed. The MIRAS had given homeowners tax relief for the interest payments on mortgages. This spike was because people wanted to buy before the tax relief was removed.

A short while later, the UK left the Europe Exchange Rate Mechanism. The interest rates went up and those who had pushed themselves to the limit could not afford repayments. Thus, some people lost their homes. This was a lesson that buyers learned when the 2009 crash happened.

As a result, banks worked hard to ensure repossessions were as few as possible. It is not likely that such a major crash will ever occur in the UK again. However, if it did, the effects would depend on how banks behaved. It is in their interest for them to avoid repossessing homes on a large scale.

Is a Crash Good for Millenials

One argument used by Brexit supporters was that there would be lower property prices and millennials could finally afford a home instead of having to rent. This might excite the young generation but the situation is different.

Many people have a fixed-rate mortgage and many others already won their home. Thus, the pressure to sell would not be as immediate. However, when you have to remortgage it might have an effect.

The market crash will most likely not help those buying homes for the first time. This crash will not happen in isolation too. For one, it will come with lower wages and higher unemployment. Since millennials and younger generations have lower experience, it would make it harder to find work. Thus, they should not rely on property prices falling.

Is Housing Prices Slow Down a Good Thing?

Nobody wants to see that but a slowdown might actually be good for the UK. Since the 90s crash, a few have continued to make a fortune from the property while others are barely making it in rental homes where they have to spend a huge amount of their income on rent.

Since the Brexit, many people have wondered what it will mean for housing prices. However, that might not matter. Some experts have suggested that the Bank of England needs to freeze the housing prices for half a decade. As a result, it will wean the UK off property speculation and lead to GDP growth.

The UK model for growth has been to attract foreign investment, which is the challenge into the UK consumers as debt. The financial crash of 2008 showed that this model was risky. Thus, a new model based on production and not debt should be the future.

This new model would end housing speculation, which causes property prices to keep growing. It also ensures that there is less capital for investment in businesses. Besides that, the renting sector could be overhauled to ensure that people’s obsession with property is reduced.

No One Benefits from a Crash

While it might seem like some would benefit from the crash, a major crash would not benefit anyone. No matter how high your rent might be, hoping for a crash will not help. What people need to realise is that once the UK leaves the EU, it might cease being as attractive for investors.

The current panic suggests that the UK is indeed obsessed with housing speculation. It is important to protect people while trying to move beyond the current situation. The most important idea to keep in mind is that once the UK leaves the EU, London property prices might fall. This is because of the importance of London as an international centre of finance could drop.

If the UK can put brakes on housing and think about innovative ways to support the masses, without them having to pay a lot for rent, this could improve the UK property market.

There is No Simple Answer

A recent study showed that about 70 per cent of people in rentals do not intend to buy a home. This might be due to how expensive property in the UK is. However, it might also be due to a generational change. Many people love the flexibility that rentals offer.

Another reason why it is so hard to discern what will happen in prices in some places in the UK has seen a spike. In fact, some experts believe that there will not be any effect on the UK market. The only way that would happen is if the Brexit caused a major economic impact. However, the UK is still a large economy with a robust and diverse economy. It also has many trade partners outside the EU.

Even if a Brexit does lead to economic shock, the UK’s economy is quite resilient, it will eventually bounce back, and property prices will rebound. The experts do agree that London will be the most affected by Brexit in property prices. Even then, there is no sign that all property investors in London will up and leave immediately the Brexit happens. In fact, the effect might be so small that no one feels any real effect due to the drop. It is more likely than not that be foreign investors investing in the UK property market will continue to stream in.