What long-term impact will Brexit have on property?

Jeremy Duncombe, director at Legal & General Mortgage Club, acknowledges it is difficult to predict what a post-Brexit Britain will look like as the specific details are still being negotiated.

The chances of the UK leaving the EU without a deal in place is looking increasingly likely.

A report by consultancy The Guide, published in October, puts the chances of a “substantive Brexit deal on either long-term or transitional arrangements being delivered (that is, agreed, ratified and implemented) before April 2019” at just 20 per cent.

A closer look at the state of the housing market may indicate whether it will withstand a scenario in which there is no deal in place at the time the UK officially leaves the EU or indeed what might happen even if there is a deal.

The impact of Brexit on Britain’s housing sector will largely depend on the actual outcome of the negotiations with the EU.Jeremy Duncombe

Mr Duncombe believes the UK property market is in a position of strength.

“Recent figures from UK Finance show that lending is on the rise and first-time buyers are having more success of achieving their home ownership ambitions, with the number of first-time buyer mortgages up 14 per cent on 2016,” he notes.

“Looking ahead, the impact of Brexit on Britain’s housing sector will largely depend on the actual outcome of the negotiations with the EU.”

Immigration, immigration, immigration

But all this uncertainty about the terms of any deal with the EU are already being felt in some form in the property market.

Zachary Gauge, European real estate analyst at UBS Real Estate and Private Markets, explains: “There hasn’t been a huge impact to date, on the pricing side anyway. If we look at the main house price indicators, they’ve stabilised, dropped slightly but certainly there’s been no indication of a big fall in property prices, and from the sounds of it outside of London the markets are actually holding up slightly better. 

“But the impression I’m getting is the market itself is a lot slower.”

With fewer transactions taking place, he supposes people are waiting to see if they can get some more clarity on some of the key outcomes of the Brexit negotiations before making any long-term purchase decisions.

He cautions that longer term though, immigration may be one of the key drivers for the residential market.

One of the main points being negotiated is a potential cap on immigration, in an effort to stem the flow of people coming into the UK.

This could be particularly acutely felt in London, where large numbers of people from around the world come to live and work, and where the financial services sector is concentrated.

Some financial groups have said they are exploring the prospect of moving their European headquarters to another city in Europe, while others are expanding their operations in Frankfurt already as they prepare a post-Brexit European hub for their business.

“The area most vulnerable to an unfavourable Brexit negotiation is London,” warns James Allen, head of Walker Crips Alternative Investments.

“The City requires access to Europe and beyond to maintain its position as one of the dominant financial centres of the world. Should the City come under sustained attack from our European neighbours then not only would property in London become less attractive, the loss of revenue would have a massive impact on GDP and the exchequer.”

With tightened immigration and a lack of skilled labour from the continent there will be little chance of addressing the lack of housing supply.James Allen

He suggests: “This, in turn, could precipitate a recession and during recessions there are more people who default on mortgages. So in the medium term, a bad deal could create further weakness in the UK property market. 

“In the long term, property prices in the UK are more affected by lack of supply than any other factor. With tightened immigration and a lack of skilled labour from the continent there will be little chance of addressing the lack of housing supply.”

London market

Alex Gosling, chief executive at HouseSimple.com, agrees: “If the City sees a mass exodus of workers relocating to France, Germany and other EU countries, that could have a significant impact on the London property market.

"Similarly, foreign investors who have pumped money into London property over the past 10 years - considering it a safe haven - may take flight. That could hit the top end of the London property market, which could work its way down the property chain.”

Crucially, he adds: “But no-one really knows if the City will lose thousands of workers when we leave the EU.”

Mr Gosling argues the property market in the UK is now less reliant on the London market than it was post-financial crisis, for example, to prop up prices.

He explains: “A decade on, there isn't such a reliance on strong London house price growth to support regional markets. In fact, it's the capital's property market that has stalled, while regional property markets are prospering. 

“This can be partly attributed to the growth of regional business hubs, such as Manchester, Cambridge and Bristol, offering good job prospects and affordable housing.”

A shortage of affordable housing has long been a problem in the UK.

Final deal

As Mr Gauge points out, if immigration were to slow down over the long term as a result of the Brexit deal secured by the UK government, or simply as a side effect of the referendum itself, then there could be another issue.

“On the immigration side, if we are thinking about development levels going forward that’s clearly something which is going to have a massive impact on the capacity of housebuilders to deliver the amount of new homes which are fundamentally needed,” he observes. 

“They [housebuilders] rely very heavily on particularly an eastern European workforce and this is actually the type of workforce which various pro Brexit ministers highlighted as being the type of immigration they wanted to slow. 

“But when you speak to housebuilders today, they’re already citing lack of labour as one of the reasons why they can’t progress with more schemes and build faster. So if you take away a big chunk of their future workforce, it costs more to employ staff to do the building work you need to do but then you have capacity constraints as well.”

David Torpey, managing director at Bluestone Mortgages, acknowledges the long-term impact of Brexit will depend on a number of factors, including the final deal which at this stage is hard to predict and how the economy performs post-Brexit.

He concludes: “I believe the UK property market will remain a stable, secure and attractive asset class, with growth at modest but sustainable levels going forward.”

eleanor.duncan@ft.com