by Alex Christou on Nov 20th, 2016
It’s been over four months since the UK voted to leave the European Union and the fallout of the housing market has yet to be as dramatic as originally predicted. While the post-Brexit market has seen a bit of a slowing in sales, it is not as bad as expected. In the days after the vote, landlords began speeding up rental agreements and estate agents started losing customers preparing for a crash of the stock market.
The time after the referendum vote to leave has been full of uncertainty and confusion as to what Brexit will bring. The uncertainty continues with the early November ruling by the high court. Now, parliament will have to vote whether or not the government can go through with Brexit and the triggering of Article 50.
While many believe parliament will stick with the original outcome of the vote, there is still uncertainty about when Article 50 will be triggered. There will likely be a delay of Theresa May’s original plan to begin the process by the end of March. This delay also keeps any negotiation processes from beginning between the UK and the EU leaving many in the dark as to what the terms of Brexit will include, such as trade and travel. May has ordered government lawyers to appeal the decision. If the appeal fails, it is unclear whether the government could appeal to the European Courts of Justice. If the government accepts the high court’s decision, then the vote will likely be before March. With the additional pressure on Theresa May from PMs, many are hoping this will cause her to pursue more of a “soft Brexit” with possibly less of an effect on the markets. The added uncertainty has created more confusion in the housing market and all of the British economy.
Some consumers and businesses are fearing a recession once Theresa May, if granted permission by parliament, pulls the trigger on Article 50, beginning the process of leaving the EU, but general consumer confidence has yet to collapse. However, it is possible that the triggering of Article 50, or the lack thereof currently, could cause even more indecision in the market than once it is implemented throughout the 2-year process. It’s also possible that the Prime Minister will be able to start building up trade relationships making the UK prosper and attractive to investors. This could welcome businesses and more foreign investments to cities like London. However, without restrictions, foreign investors could continue to make London an unaffordable city.
A survey from the Royal Institution of Chartered Surveyors (RICS) says new buyer enquiries and instructions are falling at the same rate suggesting there won’t be a downward pressure on house prices. In addition, a shortage of homes on the market can also be credited with preventing a post-Brexit slump in property prices. It is expected that the lack of supply will continue to underpin the market in coming months. In fact, RICS predicted that house prices will only increase by 3.3% a year for the next five years as opposed to their prediction of a 4% increase per year that was made pre-Brexit. If this holds true, it would keep the housing market in a similar place as where it is now which won’t be good for those that find housing unaffordable.
In August, the Bank of England cut interest rates for the first time in 7 years from an already record low of .5% to .25%. The decrease in interest rates is an antidote that will ensure that the post-Brexit economy will continue to be supported by buoyant housing prices, according to eMoov founder Russell Quirk. Policymakers are looking to cut interest rates to just above zero but wanted to wait and see the effects of the .25% cut first. The lowering of interest rates has also contributed to the fall in value of the pound against the dollar, allowing those who are buying in USD to have an effective 10% discount. In BBC’s economics editor, Kamal Ahmed’s analysis of the Bank’s decision finds that the Bank is not confident about the future of the economy, predicting that it will be 2.5% smaller within the next three years. With the increased buying of business and government debts, the Bank hopes to see an increase in available lending.
However, those that thought all of these factors might give them a better chance of buying their first home may be disappointed. The financial information service Moneyfacts said that mortgages that only required a 5% deposit were being withdrawn from the market by lenders, exhibiting the fear that lenders have of the housing market faltering. The number of home loans being offered in this category reached its peak in March at 270 but has since fallen to 225. This will greatly discourage first time buyers and prevent people from moving up the housing ladder.
While this has all greatly contributed to the market slowdown, Jonathan Hudson, London executive of the National Association of Estate Agents, credits the increased levy on stamp duty back in April with slowing the market initially.
Some hope that there will be a suspension of the stamp duty similar to what former Chancellor Norman Lamont did in the 1991 recession to kick-start sales. David Adams, a managing director at John Taylor UK, suggests that if the stamp duty is suspended, it could be restored as a two-tier system. One tier of tax would be the old stamp duty rate of 5% for UK residents while the second tier would be an increased rate for international investors. This would be a good way of preventing foreign investors from making housing unaffordable for Londoners. Especially since foreign interest is up by 50%, specifically from Australia, South Africa, and the US, as international investors intend to take advantage of the plunge of the pound. Adams’ plan would have to wait until the UK is completely out of the EU in order to impose the increased tax on international investors as it would be prohibited under EU law.
Brexit has affected construction companies as well. Barrat, the UK’s largest housebuilder, has said it may have to cut pace of construction ahead of an expected economic slowdown. Construction companies are already in the worst construction skills crisis in 20 years while they already rely on labour from abroad. Nearly 12% of the 2.1 million construction workers in the UK will face restrictions coming to and working in the UK. All of this uncertainty transfers over to the housing market; specifically, developers. They feel the pressure to sell their properties before a recession occurs. In the past, developers wouldn’t even consider an offer that was lower than the asking price. Now, they’re considering and accepting offers reduced as much as 10%. Also, pricey apartments are being advertised as being sold for less than the original price from the developer. In fact, confidence is returning to the super-luxe market since people can’t hold off on their property searches any longer. The trend of buyers not allowing Brexit to make them hold off on their home purchases will in fact help prop up the housing market as it will contribute to the shortage of homes on the market.
All of the uncertainty within the housing market is causing more and more people to rent. In the days following the vote, the rental process went much quicker. Landlords were worried that they would end up with vacant properties that the process only took a few days. Renters didn’t have to worry about bidding against other renters or being picked from a list by the landlord. However, Brexit has ended the trend of London-renting, suburbia-owning as it too risky for now. For the renters that work for large, multinational companies, Brexit has affected their rental contract lengths. Since so many of them are unsure about their job security or if they’ll be relocated to another country within the EU they only want to rent for a year as opposed to two or three. While some companies are already beginning their moves abroad, the rental market appears as if it may take a hit with less people renting as they follow their jobs overseas. Overall, there are many more rental flats coming to the market as people are too edgy to sell and people are moved overseas for work.
It is evident that Brexit has generally not had a positive effect on the housing market. Luckily, it is not as bad as expected. However, it is really too early to tell, especially after this latest court ruling. Some have predicted that the market will rebounded within 12 months time while others fear a recession. It will be easier to predict the effect Brexit will have on the housing market come next year when the parliament decides whether Theresa May invokes Article 50 and the terms of Brexit are agreed on. For now, only time will tell what a post-Brexit housing market will look like.