Britain’s decision to leave the European Union surprised many people. Within hours of the votes being counted, global markets plunged, David Cameron had resigned as Prime Minister, and sterling crumbled to a 31-year low against the dollar.
Soon after, it was reported that the UK’s economy was contracting at a quarterly rate of 0.4% - the fastest pace since 2009 – according to Markit’s PMI report.
However, recent results in the economy now show that consumer spending was up 5.9% in July on the year. Unemployment is at the lowest level since 2005 at 4.9%, and credit ratings agency Moody’s are now predicting that, although the economy will slow down, it won’t enter recession as previously thought.
But what has been the impact of the Brexit vote on the housing market so far, and what is likely to happen moving forward?
Post-Brexit jitters contributed to almost one in ten home sales falling through in London within the first fortnight of the EU vote, while buyer demand dropped to an eight-year low, according to the Royal Institution of Chartered Surveyors (RICS).
With many would-be buyers opting to sit tight to see what the economic and social impact of Brexit will be, the volume of property sales across the capital has fallen, although the introduction of higher stamp duty costs for buy-to-let investors and those acquiring second homes at the start of April has also contributed to the slowdown.
Simon Rubinsohn, RICS chief economist, commented: “Big events such as elections typically do unsettle markets, so it is no surprise that the EU referendum has been associated with a downturn in activity.”
Many analysts believe that London’s housing market was always likely to slow during the second quarter of the year, but the process has been sped up as a consequence of the decision in favour of Brexit. “The headwinds that were facing the London market in the lead up to the EU referendum have intensified on the back of the vote to leave and are resulting in slower sales rates,” said Richard Donnell, insight director at Hometrack.
However, while the Bank of England’s regional agents’ survey also shows that there has been a dip in housing market activity following 23rd June amid a new norm in market dynamics, underpinned by the ongoing unknowns, property transactions have so far proved to be more resilient than some had expected.
So what impact has the slowdown had on house prices?
Residential property prices were at the forefront of the EU debate in the run-up to the referendum, with the now former Chancellor George Osborne claiming that the value of homes in the UK could fall by up to 18%, or more than £50,000, within two years of the Brexit vote.
As anticipated, greater uncertainty in the wake of the EU referendum has had an adverse impact on household sentiment, with the latest survey, conducted in July, signalling the greatest month-on-month loss of momentum in property prices for seven-and-a-half years.
While property prices at the top of the market have been falling since the turn of the year, several indicators, including the fall in property sales, suggest that price growth at the lower end of the market in and around central London are beginning to slow after three years of double-digit rises.
This will bring some relief to would-be homebuyers in the capital, although this has not yet been picked up in the house price indices; it will be mid-September before the Office of National Statistics’ house price data starts to cover the post-referendum period.
Fresh figures from property website Rightmove also show annual house asking price growth slowing; down 0.9% month-on-month across England and Wales ending at £270,159 in July.
“In the run-up to and immediate aftermath of the referendum there was an understandable drop-off in buyer enquiries,” said Miles Shipside of Rightmove. “[Prices in London] will continue on what is often a fairly lengthy path of price reductions to encourage buyers to return in numbers,” he added.
Window of opportunity
The Bank of England’s decision to cut interest rates to 0.25%, has been a big help to maintain cheap borrowing levels for domestic homebuyers, while the weakened pound may yet fall further against major foreign currencies making assets in the UK, including property, cheaper for overseas buyers, which should boost housing demand in and around central London.
“It should be recalled that the dramatic bounce back in prime central London was supported by a weak sterling and falling interest rates during the credit crunch. Prices rallied within one year and outperformed almost all other financial indices,” said Naomi Heaton, CEO of LCP.
Early indications already suggest more international investors are preparing to take advantage of favourable property buying conditions, with mortgage enquiries from overseas buyers seeking to acquire property in the UK already up 50% since the Brexit vote, according to deVere Mortgages. Mike Coady, managing director of the firm, commented: “Those buying in the UK with their local foreign currency are finding more value than before.”
Crucially, Coady also attributes the surge in demand to the fact that the fundamental strengths of British residential property investments remain intact, despite Brexit.
Once the dust settles, the UK economy will eventually recover and property in London will remain attractive as the city holds its position as a financial powerhouse.
Despite the sharp deterioration of sentiment among buyers, mindful of the far-reaching political, economic and social ramifications that Brexit may pose for the UK, the core fundamentals remain the same, including the UK’s strong bedrock desire for homeownership.
Following the EU vote, the Council of Mortgage Lenders (CML) commissioned YouGov to undertake consumer research into tenure aspirations, and found that long-term homeownership ambitions remain strong, with 88% of adults insisting that they want to be homeowners in ten years’ time.
When asked about their preferred tenure in two years’ time, 72% said they wanted to be homeowners.
“We cannot rule out the possibility that the Brexit vote may have dented the desire for homeownership [in the immediate-term], but the survey findings are in line with results stretching back over the last 30 years,” said Bob Pannell, CML chief economist.
The general consensus may be that over the next six months activity in the market is likely to soften with small property price falls a possibility, but would-be buyers hoping for prices to drop by anywhere close to 18% as predicted by the former chancellor, George Osborne, may be in for a long wait. That is because there is an inherent undersupply of housing in London and it is difficult to see what would trigger large price falls in the longer term while this remains the case.
New housing supply
The number of new homes currently being built remains significantly below the government’s target of 200,000 new homes a year, and is almost half the estimated 300,000 new homes a year needed just to meet existing demand for housing in this country, according to a new House of Lords Economic Affairs Committee report. And yet, rather than increasing new housing supply, the latest housebuilding data shows that residential construction levels are actually falling: down by 3.2% in May – the biggest drop since February 2014.
Overall, the Yorkshire Building Society report that the UK has missed its housebuilding targets by almost 1.2 million homes since 2004, and yet early indications are that Brexit will deter housebuilders from increasing output, which is likely to heighten the housing supply crisis.
While the drop in activity may persist over the coming months, as the economy slows in the wake of the uncertainty triggered by the vote to leave the EU, housebuilders will almost certainly fail to deliver anywhere near the number of homes the country needs, which will add to the severe lack of sufficient housing supply and probably cause prices to increase further, once activity levels have bounced back. Couple this with the outstanding feel good factor of Britain’s recent sporting achievements - Murray winning Wimbledon, Chris Froome winning the Tour De France and of course the impressive results in the Olympics - and it’s easy to see how this reflects positively on how Great Britain in general is perceived internationally. Surely this can only add to the desirability, and price, of London property in the future.
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