Brexit adds to housing market uncertainty
25 April, 2016
But amid the spin, scaremongering and name calling on both sides, very few facts or augmented points have materialised. Predicting the future can be a hazardous and uncertain task, but what are the potential consequences for the UK housing market if the people of Britain vote to exit the 28-member block?
The impact of a Brexit on the property market would depend upon its impact on the economy generally. A recent survey by accountants KPMG found that 66% of property experts believed that Britain leaving the EU would have an adverse impact on inbound cross-border investment.
The housing market in and around central London would almost certainly be hardest hit. Conversely, the market may actually benefit from more inward investment if suddenly freed from EU regulations. There are various ifs and buts in the equation so long-term forecasts are often purely speculative. But as was evident in the run-up to last year's general election, when the housing market ground to a virtual halt, there is nothing that spooks markets more than uncertainty.
Early impact Uncertainty in the market ahead of the forthcoming in-out referendum has seen a 7% drop in sales transactions in London in recent weeks, and if this trend continues it will inevitably impact on the sustainability of house price growth in the near term.
Hometrack's latest UK Cities House Price Index shows that the annual rate of price growth in cities across southern England is starting to plateau as sales slow and affordability pressures on would-be buyers increase, with a Brexit likely to impact future volumes. Richard Donnell, Insight Director at Hometrack, believes that the EU referendum adds further complexity to an already complex outlook.
“A vote to remain in the EU should see a return to business as usual whereas a vote to leave will create additional uncertainty,†he said. A recent survey of over 1,000 homeowners found that many believe house prices could drop by 5 per cent in the event of Brexit in the short-term.
Fewer new homes Mounting fears about a potential exit has already led to a sharp fall in housebuilding. In February, the level of construction of new homes dropped to its weakest growth rate since June 2013, with housebuilding data from Markit/CIPS construction purchasing managers' index suggesting that developers are less willing to commit to projects due to the uncertain economic issues potentially on the horizon. Developers are currently building around half the 250,000 or so new homes that experts estimate are needed to meet existing demand, and yet an exit from the EU could see even fewer properties delivered if free movement of people across Europe is restricted, according to Bob Weston, Chairman of housebuilder Weston Homes. “The single biggest challenge to us as a business is the supply of labour,†he said. “Great Britain Plc needs the people and an exit must not exasperate the problem. Some 80% of the people working on our sites inside the M25 are not of British decent and 60% outside the M25. Who is going to build the extra 100,000 new homes a year that the government says we need?†Unsafe haven Demand for homes in the capital is very much split between national and international buyers, with the upper end of the market particularly reliant on foreign investment. London's ‘safe haven' status among investors has long made it a wealth magnet for foreign investment. The city's rich history, culture, world-class shopping facilities, political stability, reliable legal system, not to mention top schools and universities, have all contributed to attracting rich overseas property buyers. When financial and political turmoil wreaks havoc across the globe, interest in London property often surges, as wealthy overseas nationals seek a safe haven for their money. Rich eurozone citizens, for example, have used London property to escape the sovereign debt crisis and ongoing economic malaise. However, it has been suggested that a Brexit may cost London property its safe-haven status among Europeans, at least, as some of those already invested could sell up and look elsewhere in the EU, while others may be deterred from investing altogether. Local residents European citizens make up a significant chunk of the Fulham housing market. Capital moves freely in the EU making it easy for Europeans to invest in the area. Sterling is a strong currency, having rallied significantly since the financial crisis. But the prospect of leaving the EU has already hit its value against a number of major currencies, and an actual exit could weaken it further, which would leave UK property looking vulnerable from a currency point of view. The investment banks Citi and Goldman Sachs both warned a Brexit could cut sterling - currently at a seven-year low against the US dollar - by a fifth in value as investors flee the pound. Those foreigners already invested in London, including some residents living in and around Fulham, may choose to sell up rather than watch their assets lose value as sterling falls. There is also concern among many local residents who work in the financial sector that a vote by Britain to leave the EU could hit the UK's economy and prompt some banks to move away from London's global financial powerhouse. “A reduction in City employment is undoubtedly likely if the UK leaves the EU,†said Richard Champion, Deputy Chief Investment Officer at Canaccord Genuity Wealth Management. Asked about the implications of an exit for Britain's huge banking industry, Bank of England Governor Mark Carney said some big financial firms might move business out of Britain if the country did not secure the same kind of access it currently has to the EU. “One would expect some activity to move,†Carney said. “A Brexit may strengthen the City of London's standing in the world by releasing it from the EU's rules and regulations.†Room for growth While some experts are concerned about the impact of Brexit on the housing market, others think the UK's safe haven status would remain intact. There is also a chance that a weaker pound could attract more property investment in Fulham and other desirable London areas. The relative strength of sterling against emerging currencies has made property investments in the city less attractive to some overseas investors, a situation Brexit might reverse. When sterling plummeted during the last financial crisis, the London market boomed because foreign investors flooded in and bought up property in prime central postcodes at cheaper prices. Additionally, a Brexit may strengthen the City of London's standing in the world by releasing it from the EU's rules and regulations. “The UK is running at a different rate at the moment to the rest of Europe, and if you took the EU shackles off a bit, then perhaps the UK economy could move ahead faster than the rest of the EU,†said Paul Israel, Chief Financial Officer at Cogress, an open equity firm. Short campaign In the short-term at least, the EU referendum will likely suppress activity in the housing market, particularly in the UK's most expensive neighbourhoods, such as Fulham, with transactions likely to fall, as they did in the lead up to last year's general election and the Scottish referendum in 2014, as uncertainty dominates the debate ahead of the poll on 23rd June. But given that the EU referendum is a short campaign in comparison, the impact may be less pronounced. The question is what will happen thereafter? One way or another, many buyers and sellers may refrain from participating in the market until the issue is resolved and the uncertainty removed.
The impact of a Brexit on the property market would depend upon its impact on the economy generally. A recent survey by accountants KPMG found that 66% of property experts believed that Britain leaving the EU would have an adverse impact on inbound cross-border investment.
The housing market in and around central London would almost certainly be hardest hit. Conversely, the market may actually benefit from more inward investment if suddenly freed from EU regulations. There are various ifs and buts in the equation so long-term forecasts are often purely speculative. But as was evident in the run-up to last year's general election, when the housing market ground to a virtual halt, there is nothing that spooks markets more than uncertainty.
Early impact Uncertainty in the market ahead of the forthcoming in-out referendum has seen a 7% drop in sales transactions in London in recent weeks, and if this trend continues it will inevitably impact on the sustainability of house price growth in the near term.
Hometrack's latest UK Cities House Price Index shows that the annual rate of price growth in cities across southern England is starting to plateau as sales slow and affordability pressures on would-be buyers increase, with a Brexit likely to impact future volumes. Richard Donnell, Insight Director at Hometrack, believes that the EU referendum adds further complexity to an already complex outlook.
“A vote to remain in the EU should see a return to business as usual whereas a vote to leave will create additional uncertainty,†he said. A recent survey of over 1,000 homeowners found that many believe house prices could drop by 5 per cent in the event of Brexit in the short-term.
Fewer new homes Mounting fears about a potential exit has already led to a sharp fall in housebuilding. In February, the level of construction of new homes dropped to its weakest growth rate since June 2013, with housebuilding data from Markit/CIPS construction purchasing managers' index suggesting that developers are less willing to commit to projects due to the uncertain economic issues potentially on the horizon. Developers are currently building around half the 250,000 or so new homes that experts estimate are needed to meet existing demand, and yet an exit from the EU could see even fewer properties delivered if free movement of people across Europe is restricted, according to Bob Weston, Chairman of housebuilder Weston Homes. “The single biggest challenge to us as a business is the supply of labour,†he said. “Great Britain Plc needs the people and an exit must not exasperate the problem. Some 80% of the people working on our sites inside the M25 are not of British decent and 60% outside the M25. Who is going to build the extra 100,000 new homes a year that the government says we need?†Unsafe haven Demand for homes in the capital is very much split between national and international buyers, with the upper end of the market particularly reliant on foreign investment. London's ‘safe haven' status among investors has long made it a wealth magnet for foreign investment. The city's rich history, culture, world-class shopping facilities, political stability, reliable legal system, not to mention top schools and universities, have all contributed to attracting rich overseas property buyers. When financial and political turmoil wreaks havoc across the globe, interest in London property often surges, as wealthy overseas nationals seek a safe haven for their money. Rich eurozone citizens, for example, have used London property to escape the sovereign debt crisis and ongoing economic malaise. However, it has been suggested that a Brexit may cost London property its safe-haven status among Europeans, at least, as some of those already invested could sell up and look elsewhere in the EU, while others may be deterred from investing altogether. Local residents European citizens make up a significant chunk of the Fulham housing market. Capital moves freely in the EU making it easy for Europeans to invest in the area. Sterling is a strong currency, having rallied significantly since the financial crisis. But the prospect of leaving the EU has already hit its value against a number of major currencies, and an actual exit could weaken it further, which would leave UK property looking vulnerable from a currency point of view. The investment banks Citi and Goldman Sachs both warned a Brexit could cut sterling - currently at a seven-year low against the US dollar - by a fifth in value as investors flee the pound. Those foreigners already invested in London, including some residents living in and around Fulham, may choose to sell up rather than watch their assets lose value as sterling falls. There is also concern among many local residents who work in the financial sector that a vote by Britain to leave the EU could hit the UK's economy and prompt some banks to move away from London's global financial powerhouse. “A reduction in City employment is undoubtedly likely if the UK leaves the EU,†said Richard Champion, Deputy Chief Investment Officer at Canaccord Genuity Wealth Management. Asked about the implications of an exit for Britain's huge banking industry, Bank of England Governor Mark Carney said some big financial firms might move business out of Britain if the country did not secure the same kind of access it currently has to the EU. “One would expect some activity to move,†Carney said. “A Brexit may strengthen the City of London's standing in the world by releasing it from the EU's rules and regulations.†Room for growth While some experts are concerned about the impact of Brexit on the housing market, others think the UK's safe haven status would remain intact. There is also a chance that a weaker pound could attract more property investment in Fulham and other desirable London areas. The relative strength of sterling against emerging currencies has made property investments in the city less attractive to some overseas investors, a situation Brexit might reverse. When sterling plummeted during the last financial crisis, the London market boomed because foreign investors flooded in and bought up property in prime central postcodes at cheaper prices. Additionally, a Brexit may strengthen the City of London's standing in the world by releasing it from the EU's rules and regulations. “The UK is running at a different rate at the moment to the rest of Europe, and if you took the EU shackles off a bit, then perhaps the UK economy could move ahead faster than the rest of the EU,†said Paul Israel, Chief Financial Officer at Cogress, an open equity firm. Short campaign In the short-term at least, the EU referendum will likely suppress activity in the housing market, particularly in the UK's most expensive neighbourhoods, such as Fulham, with transactions likely to fall, as they did in the lead up to last year's general election and the Scottish referendum in 2014, as uncertainty dominates the debate ahead of the poll on 23rd June. But given that the EU referendum is a short campaign in comparison, the impact may be less pronounced. The question is what will happen thereafter? One way or another, many buyers and sellers may refrain from participating in the market until the issue is resolved and the uncertainty removed.