London didn’t want Brexit. Even those who professed to support it scarpered soon after the result was announced. But that doesn’t mean it is the root of all our problems. Nowhere is that more true than in the housing market. There will be some drama for sure — but don’t let’s blame Brexit for everything.
London’s house prices have seen year upon year of double-digit growth. Land Registry data shows this remained the norm for two thirds of London’s boroughs in the year to May.
But at the very centre, some changes were visible. The affluent boroughs of Islington and Hammersmith & Fulham saw modest growth of 4.7 per cent and 2.7 per cent, while prices in the richer neighbourhoods of the City of London and Kensington & Chelsea fell by 9.2 per cent and 2.5 per cent respectively.
Before Brexit, this was widely attributed to an oversupply of luxury dwellings and the new 12 per cent stamp duty on properties priced above £1.5 million starting to bite. Both factors remain, so it should be no surprise that the prime market continues to cool and that this is rippling out to higher-priced properties across London.
Robert Gardner, Nationwide’s chief economist, says: “Housing market transactions were always likely to soften over the summer after the surge in activity in March, as buyers brought forward purchases of second homes to avoid the stamp duty levy, which took effect in April.”
A ripple is not a flood
With a cooling trend established, and uncertainty about just what Brexit will bring, it is easy to think the worst. Don’t. Nina Skero of the Centre for Economics and Business Research (CEBR), says: “Although Brexit has certainly sent shockwaves, CEBR expects the housing market to slow down but not plummet.” In London, the consultancy forecasts growth this year, in 2018 and beyond, with a modest 5.6 per cent contraction next year.
Simon Rubinsohn, chief economist at the Royal Institution of Chartered Surveyors, similarly speaks only of the potential for a “dip in prices” in London. Longer term, “prices are expected to rise, albeit a little less than previously anticipated, with a cumulative increase of 14 per cent projected for the next five years.”
Even if former Chancellor George Osborne’s more pessimistic scenario of an 18 per cent fall in property prices is correct, it would only mean a return to last year’s levels for much of London. That’s not a catastrophe.
Supply and demand
The reason for experts’ lack of panic is simple: London’s housing market has solid foundations. Chronic under-building means the capital has an insufficient supply of affordable homes. If anything, Brexit will make this worse.
In the immediate aftermath, shocked households cancelled sales, contributing to the steepest fall on record in the stock of housing coming available for sale, as recorded by the Royal Institution of Chartered Surveyors residential survey. If protracted Brexit negotiations keep households cautious, stocks are likely to stay historically low.
The uncertainty churned up by Brexit may also see some new build shelved as developers worry about profits, particularly if the industry’s skill shortage is exacerbated by much-needed EU construction workers going home.
With insufficient supply, demand would have to fall an extraordinary amount to deliver a multi-year fall in prices. This just isn’t likely. The English Housing Survey shows the proportion of renters almost doubled in the decade to last year, and 70 per cent were under 45. We know them as Generation Rent and their pent-up demand will act as a major brake on falling prices — particularly at lower levels.
Secondly, unlike 2008, mortgage financing is plentiful and incredibly cheap. HSBC’s latest two-year fixed rate is just 0.99 per cent (maximum loan-to-value 65 per cent), while Barclays’ best two-year tracker mortgage rate is a tiny 1.49 per cent (maximum loan-to-value 60 per cent). Mortgage financing may get even cheaper if the Bank of England’s monetary policy committee delivers its widely expected cut. This means that those who want to buy can do so, keeping demand supported.
Thirdly, the UK economy starts the Brexit negotiations in really good shape. It expanded by 0.6 per cent in the second quarter and employment hit a record high in the three months to May. While Brexit is expected to knock this stellar performance, weaker growth and heightened uncertainty is likely to affect both housing demand and supply. This is likely to mean lower activity levels, but not necessarily lower prices. Finally, don’t forget our foreign friends. Sterling is down about 10 per cent against the dollar and the euro since the vote. A softening of the economy or a cut in interest rates could see it fall further, making UK property even more of a bargain for overseas investors. They were quick to seize their chance in 2008 and will likely do so again.
It’s a great year to buy a mansion — and there’s potential to snap up a more affordable home
London’s market was already softening before June’s vote, partly because of stamp duty changes, and partly as it had priced itself beyond many people’s pockets. The political shock of Brexit has and will continue to cause uncertainty, act as a drag on economic activity and feed through to softer house prices, particularly at the top end.
But after years of under-building, plenty of cheap financing and a “generation” of frustrated buyers waiting in the wings, you’ll be sorely disappointed if you’re hoping for a rerun of the 2008 property slump.