MortgagesDec 7 2016

Property prospects post-Brexit

twitter-iconfacebook-iconlinkedin-iconmail-iconprint-icon
Search supported by
Property prospects post-Brexit

Following the referendum, buyers and sellers paused to see whether job security and/or access to competitively priced mortgages were likely to change. There is no doubt most are taking longer to commit and negotiating harder so some property prices have softened.

About four out of five of sellers are also buyers. Most customers tell my north London agency that the difference between the sale and purchase price is more important to them than the amount paid or received.

The short-term effects of the Brexit vote were probably over-estimated, but the long-term impact may have been underestimated. The Bank of England showed its determination to reduce the risk of recession by cutting already rock-bottom interest rates, although the fall in sterling and almost certain rise in inflation means a further reduction is unlikely before the new year.

In addition, lenders’ capital requirements were relaxed to allow an extra £150bn of borrowing, whereas there was £170bn of money printing/quantitative easing, and a £100bn scheme to force banks to pass on lower interest rates to households and businesses was introduced.

The Bank predicted that UK GDP would grow almost twice as fast in 2017 as previously predicted after the UK defied expectations of a downturn following the referendum.

Positive property data has prompted an upturn in fortunes for the housing market. The Office for National Statistics reported in October that average house prices continued to rise. Halifax said prices recorded their biggest increase since last March, but annual growth and transaction volumes slowed.

On the other hand, the Royal Institution of Chartered Surveyors said the market is “settling” with buyer inquiries up for two consecutive months after falling immediately after the referendum, partly because stock remained at record lows.

Confidence returning

Online property portal Rightmove indicated underlying confidence was returning with prices reducing, but not by as much as might have been expected at this time of year. Transaction times are holding steady with a sellers' market emerging in the north of the UK and buyers on top in the south.

There are conflicting signals from lenders. The Council of Mortgage Lenders says mortgages are now much more affordable than they have been for a long time. In September, homebuyers spent 17.7 per cent of their average incomes on average on mortgage repayments compared with 23.7 per cent eight years ago.

Although there was a fall in overall house purchase lending in September compared with the previous month, the volume of loans and amount borrowed was at its highest for a September since 2007. Conversely, the British Bankers’ Association said mortgage approvals arranged via high-street lenders recovered only modestly in September after a 19-month low, but remain 15 per cent down on a year ago.

The fall in the value of sterling since the referendum has made building materials from abroad more expensive, which has been partly offset by more sales to foreign investors, although some are waiting to see if values and/or sterling fall further.

Overseas occupiers and investors have in the past been blamed for inflating property prices. However, off-plan or bulk sales to these buyers underpin nearly every development – especially in London – so directly or indirectly help those seeking affordable homes to rent or buy.

The government wants to see the new realism in buying and selling spread to the land market. One of the biggest barriers to increasing the supply of new homes and balancing prices long term has been unrealistic price expectations from landowners.

Construction of homes

House building increased in October, raising activity in the construction sector to a seven-month high, according to analyst Markit CIPs. Meanwhile, the National House Building Council said almost 36,000 new homes were registered in September, the highest since 2007 although unchanged year-on-year.

According to the government’s own figures, net additions to stock reached an eight-year high of 189,000 last year, figures which are still well below the 230,000 households likely to be formed each year until 2030. The present shortfall has been estimated at more than 1m homes – and is growing.

The ONS said a more recent fall in private and, especially, public sector house building was not linked to Brexit as the reduction in new infrastructure accounted for almost half the decline. Supply next year is likely to come under more pressure as the falling pound brings additional price pressures, bearing in mind, for example, the higher cost of building materials sourced from abroad.

Even if UK net migration falls as a result of the referendum, the government has reiterated that a minimum of 200,000 homes per annum need to be built for the next 15 years at least. Help to Buy and other government initiatives will assume greater importance in the delivery of new homes, given the potential of housing to help stimulate the wider economy.

A £3bn home building fund to provide house builders with cheaper funding and guarantees was anticipated as part of the Chancellor’s Autumn Statement. Provisional details were announced at the Conservative Party conference, which include short-term loans to SMEs, provided it can be shown that, without the funding, the project would not progress as quickly – or at all.

Efforts will also be increased to reduce the time to obtain planning, improve accessibility to finance for smaller developers and investment in infrastructure as well as ensure a substantial proportion will be built offsite in an attempt to double the speed of delivery.

Lenders, who are crucial to economic recovery, are not in the same precarious financial position as they were during the 2008 recession, partly as debt levels are much lower although loan-to-value rates do not seem to have reduced much.

House prices are unlikely to fall dramatically in the near future, but could rise more slowly with lender caution and fewer transactions in places where affordability has been most stretched.

Shortage of stock

Lack of stock and very low interest rates continue to underpin further price rises especially in London and the south east, but are more acute now than in the recession of 2007/8.

I do not expect to see a mass exodus from London as demand is not just determined by Brexit, but by business networks, depth of skills, culture, lifestyle, education, language and security, so the capital is likely to remain a popular place to live and work.

London is the engine of the national economy and the principal source of taxation revenues, so the government will not want to see a substantial reduction in activity.

If the government can offer a strong vision for the country’s post-referendum future – including a strict timetable for exit from the EU – greater confidence and stability will result. Otherwise we may see the property market and broader economy flatlining at best for some time.

While the underlying fundamentals of the economy are strong and demand continues to far outweigh supply – not just in London – upward price pressures will remain. The property market may have experienced a stumble rather than a fall since the Brexit vote, but it is definitely business (almost) as usual as far as the majority of my agency's customers are concerned.

Jeremy Leaf is a north London estate agent and former residential chairman of Rics 

Key points

Positive property data has prompted an upturn in fortunes for the housing market.

The government wants to see the new realism in buying and selling spread to the land market.

Additions to stock reached an eight-year high of 189,000 last year.