The UK’s decision to leave the European Union (EU) on June 23rd sent shockwaves across the world and its impact was acutely felt in the nation’s property market. The dramatic result’s initial effect on the sterling, the stock market, financial services, property funds and manufacturing industries seemed to confirm fears that the UK was headed for a property crash akin to what happened in 2008.
In the months following the referendum, London property has felt the affects Brexit more acutely than other parts of the Uk, despite this the market has been performing unexpectedly normal. The slowdown has not been as dramatic as many predicted, although transactions levels have lowered. Some may be quick to attribute this fall to the turmoil caused by the referendum. However, this overlooks other important contributory factors.
Firstly, the referendum coincided with a traditionally quiet time of year for the property market. The summer holiday season conventionally sees fewer transactions than at any other points during the year. Secondly, transaction levels were already low in London and the South East prior to the Brexit vote because of the increase in stamp duty, which came into effect on April 1st of this year. This policy change has had greater repercussions on London’s market than elsewhere, as the capital has a higher concentration of properties with top end prices. Nonetheless, the sterling’s sharp decline against the US dollar sparked by the 23rd June vote for Brexit has buoyed demand from foreign investors, offsetting the recent tax hike. In real terms, this has meant that people buying with US Dollars have been receiving up to a 10-15% discount on central London properties post-Brexit.
In spite of some softening of house prices in prime central London, the average house prices across the UK continues to climb – albeit at a slower pace than in the past three years. The true litmus test for house prices will occur from September onwards, when vendors and purchasers traditionally return to the market after the holidays. A more thorough examination of Brexit’s influence will, therefore, only be possible at the end of 2016.
When gauging London’s market with a longer view in mind, there are a number of factors that will affect how (and if) London property will continue to thrive in the medium- to long-term.
The property market is far from settled and there will be a prolonged period of uncertainty while property stakeholders wait for article 50 to be triggered. The ultimate longer-term impact of the June 23rd vote hinges on the kind of Brexit trading arrangements the UK strikes with Europe and the rest of the world. Only once these agreements have been settled, will we be able to assess the state of the property market.
In the meantime, London still has a huge under supply of homes that is unable to satisfy demand. With no indication that demand will stagnate in the immediate future, prices at the lower- and middle-range of the capital’s market look set to remain solid. Add to this, the Bank of England’s recent interest rate cut, allowing for cheaper borrowing than ever before, and it becomes difficult to forecast a situation in which London’s housing supply will outstrip its demand.
There is little doubt right now that London will remain a global, cosmopolitan city, even if triggering article 50 and its processes result in volatility across the currency and stock markets. In this scenario, London property may well yet be seen as a safe haven for investors as it is a tangible and less volatile asset. More than that, we can never underestimate the power of Britons’ obsession with bricks and mortars to propel the market in turbulent times.
*As published at the Institutional Real Estate Europe in October 2016. Potential investors must rely on their own due diligence prior to investing.