Brexit and The London Property Market
November 14th 2016
It is clear we are in a very strange market - but we've seen it before.
As buyers eagerly await some form of indication as to how things will look after Article 50 has been served to the EU, the bottleneck continues to grow.
The top end of the market has been worst affected and according to Land Registry data, only ten transactions over £10m happened in quarter three this year, compared with thirty-five for the same period in 2015.
This is due in part, by the stamp duty and tax changes imposed over the last two years, affecting the top end of the market worst, as well as the strong rises seen in the preceding years. Though now, prices have corrected to reflect the stamp duty changes, and in some cases, gross costs (cost of the property and stamp duties) are lower than before the stamp duty changes were introduced.
All areas see slowdown, but some more than others
Prices have dropped 3 - 7% in many areas this year, and by as much 15% for new builds over the past year and a half, but it really depends on the area and the level of the market. The Land Registry data and other house price indices do not show the true picture as they look at London as a whole. Local housing markets in London, much like the city itself are diverse and nuanced.
All levels of the market have slowed to some degree but the lower end (sub £750,000) has been the impacted the least. Even with the 3% second homes penalty, gross costs remain about the same give or take a few thousand pounds, keeping this level of the market stable.
Part of the slowdown can be attributed to the fears surrounding Brexit. But it is now looking likely that any proposed deal to leave the EU will need to be agreed by parliament, aka - ‘soft Brexit’.
Regardless whether we have a ‘hard’ or ‘soft’ Brexit, the worst thing for the economy and the housing market is uncertainty. Once the decision is made and the terms become clear, buyers will return to the market.
At present, there are three possible routes the country will be presented with, most probably in Spring next year, and all will have different consequences for the London market, though no option is likely to be that severe.
Subject to the recent legal case being overturned in the supreme court in December, a soft Brexit looks the most realistic possibility. Keeping the free movement of people and remaining in the single market – expect a rush back to the market mostly from domestic as well as many foreign buyers who already have their money in sterling. The pound will likely strengthen against the major currencies, though it will be some time before it reaches levels seen in early 2016.
In other words, a soft-Brexit would, in real terms, mean things would remain largely unchanged economically, but without the EU having dictation over the curvature of our bananas.
At the moment hard-Brexit looks less likely. This would see the UK withdrawing from the common market and imposing a points-based system on EU citizens wanting to reside here (it has been stated that many of those already residing here would not need to apply for visas).
This outcome would see the pound remain weak for some period of time, at least until trade policies have been renegotiated, which may be as long as two years.
It is likely this would have a more significant impact at the lower end of the London market where many mainland EU buyers invest or buy to reside. But, it is likely the top end of the market, subdued for the past two years, will see demand increase as many, if not most of the buyers at this level, as visa requirements would remain unchanged in any new deal. If anything, it is possible they might be relaxed as the UK opens up to Commonwealth and former Commonwealth members in a bid to expand its trade influence.
The mix-and-match Brexit
Would mean staying in the single market but restricting the free movement of people from within the EU. This has been touted as being the most desirable outcome for the government as it would fulfil the desires of the electorate who voted leave. Though Brussels have categorically stated if the UK wants access to the single market, it must allow free movement of people.
That said, it would not be inconceivable for the EU to concede despite the threats. With the UK representing over 15% of the EU’s current economy, it is within the EUs interest to keep the UK in the single market. Arguably, it could be said the that the UK is worth more to the EU than vice-versa.
A slim possibility if an early election is called. There is a chance it might happen, albeit, a very remote as this would be against the will of the majority. The pound would almost certainly see strong rises in the long term.
It is unlikely property prices will grow by the 10 to 15% per annum seen between 2010 and 2015, but there are certainly more opportunities in the market now than there has been for some time.
Over the coming months, we are unlikely to see much change while the house of commons squabble over the terms of the deal. Most critics expect negotiations with the EU to start in early 2017 so things should become clearer on the EU deal by mid-2017.
The bottleneck in the market will, at some point, cause prices to rise again. It’s a question of when, not if.
The majority of buyers holding off will rush back to the market and start bidding over the asking price, largely at the same time.
This, unfortunately, is how markets (and humans) have behaved since the beginning of time and it doesn't look like either will be changing anytime soon.