With a ‘No-Deal’ Brexit an increasing possibility, Paresh Raja, CEO of Market Financial Solutions, explains how the property market could be affected.
Despite the United Kingdom (UK) voting for Brexit in 2016, the UK property market has been remarkably resilient. The market’s total value has risen year on year, with established cities like London and emerging regional markets like the Midlands offering some of the most attractive locations for property investment in Western Europe.
However, with Theresa May stepping down this week without a Brexit withdrawal agreement in place, there remains a degree of caution about the future performance of the real estate. Consequently, more and more stakeholders from across the industry including developers, investors and landlords have adopted a ‘wait and see’ approach, preferring to delay transactions until Brexit is settled.
Underlying much of the anxiety is the very real prospect of a ‘no-deal Brexit’, a scenario whereby Britain leaves the European Union (EU) without a withdrawal agreement in place. Experts have rightly warned of the potential for disruption to important sectors of the British economy including trade, fishing and border control if a deal cannot be agreed ahead of UK’s scheduled departure on 31October 2019.
However, little’s been said about the detrimental impacts of no-deal on Britain’s’ property market. So how exactly would leaving without a deal affect the property markets and the industry more generally?
Since the vote to leave in June 2016, house prices have hardly plummeted. In fact, the average house price has generally risen, following a trajectory that can be traced back to 2009.
However, the most significant impact of no-deal won’t be on housing prices but on transaction levels. Lower numbers of property sales in a given period usually indicate a degree of uncertainty in the market. When seasonally adjusted, transactions have remained fairly stable at around 100,000 a month but experts predict that a no-deal Brexit could see homeowners put off selling due to concerns that they buyers won’t be able to meet their asking price. Governor of the Bank of England, Mark Carney, even went as far as to warn that house prices could fall by up to 35% if a no-deal Brexit isn’t avoided.
Of course, lower prices could represent an opportunity for investors who effectively receive a discount on market value. If no-deal Brexit does reduce overall demand then it’s likely that properties would be available for purchase for below their true value, thereby allowing investors to generate healthy returns on any assets purchased during the no-deal period.
With the risk of falling prices and a choppier economic outlook more generally, it’s safe to assume that lenders will tighten their approval criteria and mortgages will be harder to come by. This has the potential to suppress demand regardless of the housing market’s overall strength as likely buyers could struggle to secure the finance required to complete a purchase.
More restrictive lending practices won’t just impact property investors. The British construction industry could also suffer if no-deal makes it harder for them to finance new developments, leading to a lower supply of housing. It’s widely accepted that the ongoing housing crisis is largely due to a lack of new house building and this trend is only set to continue after a no-deal Brexit should the Government fail to actively address this challenge.
Ultimately, the volatility engendered by no-deal could create challenges for different areas of the property market. While the property market has proven resilient in times of transition and change, the issue now is the Government’s failure to provide clarity on just how Brexit will be managed in the medium to long term. As such, this has created a climate where all parties within the industry are struggling to plan for the eventuality of no-deal.
It’s likely that a no-deal Brexit will precipitate a long transition period, but it is important to note that this does not naturally mean investors, homebuyers and developers will be adversely affected. If they are given a better indication as to how Brexit will be managed, they are then positioned to effectively plan for the future. This why the upcoming Tory leadership campaign is vital, offering Westminster a key opportunity to unite opposing factions and provide the leadership and clarity the country as a whole is calling for.
An end to the uncertainty?
The UK property market has proven remarkably resilient over the last decade with year on year growth in the aftermath of the EU referendum in June 2016. However, no-deal would be a destabilising force in the short term even if the overall market remains solid.
Consequently, it’s imperative that the government begins showing real leadership about the post-Brexit direction of UK housing policy. For instance, by making finance available for new housing developments, the government could mitigate against some of the potential challenges that no-deal represents to the construction industry.
While the Tory leadership contest is expected to dominate the headlines this summer, housing policy remains one of the defining challenges facing the next prime minister. Even in the eventuality of no-deal, it’s for the government to start providing a clear direction for the industry to follow. Otherwise, the only certainty with a no-deal will be uncertainty, in the short term at least.
Paresh Raja, CEO, Market Financial Solutions