BrexitApr 24 2019

What is in store for property?

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What is in store for property?

At worst they would fall by a little under 9 per cent; household finances would be squeezed and costs of mortgage debt would rise.

Despite the nation’s unwavering obsession with house prices, Prime Minister Theresa May was handed the unenviable task of trying to piece together a Brexit shaped jigsaw, by virtue of a vote that left David Cameron, the former prime minister, contemplating his future in a £25,000 shepherds hut with wool insulation and a wood-burning stove to keep him warm.

Two years passed and, while price growth slowed, data from Nationwide Building Society suggested the average UK house price was 5 per cent above where it was at the time of the Mr Osborne’s pronouncements. 

Wage growth remained robust, employment high and the average rate for a five-year fixed mortgage was 50 basis points below where it was in June 2016.

However it was becoming clear that Mrs May was going to have to put together her jigsaw without a picture to work from. Sentiment, more than economics, was going to dictate national house price movements, at least until a deal could be agreed with the EU and – more importantly – passed through parliament.

As a deal became increasingly difficult to deliver and the odds for a no-deal Brexit shortened, potential home-buyers became more cautious.

Despite a competitive mortgage environment and a continuation of decent employment and earning numbers, new buyer enquiries fell month-on-month according to the Royal Institution of Chartered Surveyors as uncertainty over the future of household finances grew. 

Where has that left us?

At the end of the first quarter of 2019, annual house price growth across the UK stood at a meagre 0.4 per cent; a fall of 2 per cent in real terms. 

Transactions, too, are down, though perhaps not nearly as much as expected.  

In the year to the end of February they stood at 1.2m; only 26,000 down on a year previous and 95,000 down on those in the year to June 2016, (when they had been artificially boosted by a rush of investors before the pre-announced stamp duty surcharge).

In both cases they show some trends that have less to do with Brexit than the headline numbers.

At about the same time as the EU referendum, the mainstream London market hit up against the buffers of mortgage regulation. 

The market had become confined to more affluent households, borrowing close to the limits that the mandatory stress testing of affordability would permit. 

The scale of the financial commitment of buying in London has left that market most exposed to a change in sentiment and so the capital has endured modest price falls. 

That has had a reverse ripple effect in the commuter zone. But elsewhere, where the post-credit crunch recovery was more drawn out, the market has been a more normal footing.

Those trends are not just geographical.

At the top end of the market, taxation has combined with political uncertainty and prices have fallen.  

Buy-to-let investors also have been even harder hit with taxation, most notably the progressive restrictions on tax relief on mortgage interest introduced by Mr Osborne. 

Q1 2019All prime London averagePrime central LondonOuter prime London
Quarterly growth-0.3%-0.6%-0.2%
Annual growth-2.5%-3.7%-2.0%
Since peak 2014-11.9%-19.4%-8.3%

Source: Savills prime London index Q1 2019

Where they require any significant level of mortgage debt they risk being put on the endangered species list.

First-time buyer numbers, on the other hand, remain incredibly robust, boosted by substantial support from the bank of mum and dad and the Help-to-Buy scheme in overcoming what remains a substantial deposit hurdle.

So what about the future?

Irrespective of the Brexit outcome, some of the structural and cyclical changes in the UK house market will continue to shape the market. 

It appears that we are firmly in the second half of the geographical housing market cycle.

Government support for first-time buyers in the form of Help-to-Buy will be with us until April 2023. Mortgage regulation is here to stay.

Assistance from older generations to help their children or grandchildren get on or trade up the housing market seems to have become an established trend.

Brexit means that, while ultimately the house prices and market activity will be dictated by economics and affordability, in the short term, sentiment will continue to hold sway.

If you assume that the biggest uncertainty surrounds what would happen to household finances in the event of a no-deal Brexit, anything that reduces that risk should make potential buyers less acutely cautious. 

When Mark Carney, governor of the Bank of England, somewhat unhelpfully revealed a ‘scenario’ of a 33 per cent house price fall in the event of a hard Brexit back in September 2018, it was on the extreme assumption that bank base rates would increase significantly and that this would be compounded by an increase in lenders’ margins. 

Plug those assumptions into any housing affordability model and you will come up with a dramatic answer. However, the mention of it alone was enough to spook the market.

The combination of an extension to Article 50 to October 31, the stated desire of a majority in parliament to avoid no-deal Brexit and the commencement of cross-party negotiations suggests that prospect has receded. But it does not necessarily mean we should expect a sustained bounce just yet.

Immediately after the EU voted to extend Article 50 to give parliament enough time to reach agreement, but not enough to allow further procrastination, investment bank and financial services company Morgan Stanley put the risk of a no-deal Brexit at just 5 per cent. 

But they equally weighted the alternative prospects of a cross-party deal, second referendum and early elections. 

Against the backdrop of these scenarios, they put the chance of an orderly Brexit as twice that of remaining in the EU.

Even if a deal is agreed to facilitate such an orderly Brexit, any new leader of the minority government who has to work through the two year transition period will be passed a half finished jigsaw. 

Elements of political and economic uncertainty will remain. That suggests the expected improvement in buyer sentiment will be limited, that the housing market will remain price sensitive and that those in the market will need to maintain a sense of pragmatism.  

Beyond that, much will depend on what deal is struck and what this means for interest rates and wage growth.

It has long been our view that when interest rates start to rise they will act as a drag on house prices, growth as mortgage regulation puts the brakes on people’s ability to take on more debt relative to their income. 

That suggests any secondary resurgence of house price growth when the political process has finally been put to bed will be less pronounced than in previous cycles.

Key Points

  • Former chancellor George Osborne warned that the housing market would fall 10 per cent to 18 per cent if UK voted for Brexit
  • At the end of the first quarter of this year, annual house price growth across the UK stood at 0.4 per cent
  • Fears are greatest around the event of a no-deal Brexit

Lucian Cook is director of UK residential research at Savills