The Referendum and UK Property

Speculation as to the effects the Referendum may have on the UK property market is rising, as we approach the official vote on June 23rd. With just a few days to go, the British population, like the political parties, are split as to which outcome is best.

The Financial Times EU Referendum poll tracker currently has the Leave and Remain sides neck and neck, with around 12% of the UK stating that they are undecided. However, these statistics are changing daily. (1)

There are two distinct sides to the demand in the property market: domestic and overseas. On one hand there are the first-time buyers trying to get onto the property ladder, and on another, rich Europeans buying multi-million-pound property in central London. They operate with different motives in different markets, and if we were to leave the EU, this outcome would certainly affect them in different ways. (2)
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Staying within the European Union means property prices could be set to rise by more than 9%, which would be beneficial to those who are already property investors. It is a nearly guaranteed asset investment. What the European Union offers, is more stability as leaving the EU is unknown and unpredictable, with forecasts of up to18% loss on property value. Remaining allows professionals to calculate financial patterns and the status quo of the economy. This is paramount when it comes to steady mortgage rates. (3)

George Osborne, known to be against Brexit, has dismissed the argument that lower inflation and competition from immigration would benefit first-time buyers. He stated first-time buyers would be ‘hit because mortgage rates go up and mortgages become more difficult to get. It would be a “lose-lose situation” for anyone who owned or wanted to buy a home’. In essence, first-time buyers may have less competition from others to buy housing, however, reduced income and increased mortgage rates would mean in order to obtain a mortgage, many would have to take out large bank loans. (4)

The solution George Osborne presents is to build more affordable housing, telling the BBC, "We all want affordable homes, and the way you get affordable homes is by building more houses" (5)

In terms of London, which is affected the most by the EU, the capital is highly populated by some of the world’s wealthiest people. Ratings agency Moody’s states that currently 49% of homes over £1m are bought by foreign nationals. Remaining in Europe guarantees a continuance of expensive homeowners coming from Europe. London property is seen as a "safe haven" asset: it retains or increases its value and is protected by the stability and security of a liberal democracy. (6) If Britain were to leave the European Union investors may not deem this to be the case. Property investors are inserting “Brexit clauses” in commercial deals to allow them to pull out. (7)

Why might this be bad for property investors?

The biggest fear for staying in the EU is the rise of the price of the property market for future investors and the surge of people who want to invest. Net migration, for which the UK’s population is set to rise to 70 million over next decade, will increase house prices and rent. (8)

Michael Gove, the justice secretary, stated that the population of the UK would increase by five million EU citizens, equal to adding the entire population of Scotland by 2030 if we voted to remain. (9)  Not only immigrants, but EU students and refugees can also have an impact on the housing market. Though most migrants are working age, they often bring dependants with them. This could mean even more housing and population increase without them necessarily working. (10)

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The housing crisis is essentially caused by a substantial shortage of homes.  The benefits of Brexit for property investors largely revolves around property demand.  If availability increases and inflation drops, it means affordability for first-time buyers.

Ratings agency Fitch claims that housing prices would be brought back to a more affordable level.  Currently, UK house prices are up to ‘25% above “sustainable” levels in relation to disposable income’, in other words, house price inflation and rental growth would be slowed so more people could afford to buy.  Similarly, a report by the Centre for Economics and Business Research states that the EU could reduce the total value of UK housing by £26.5bn by 2018.

Stricter immigration laws will lessen the competition for rental properties and, in theory, lead to lower rents. Foreign-born nationals are three times more likely to be renters than British-born residents, according to the Migration Observatory. This may also be impacted by less EU university students who populate large cities such as Manchester and Birmingham.

Why might this be bad for property investors?

Mark Carney, governor of the Bank of England, said Brexit could include a ‘technical recession’ and mortgage costs for homeowners could rise. If the economy suffers, banks won’t lend and buyers may become nervous of the market.  If landlords cannot afford their higher mortgage repayments, due to the economy, they may sell. Whilst a lack of demand means prices will come down for the average established adult, restrictive mortgage lending, and job losses will affect young people the most, first-time buyers would not necessarily increase.

Leaving the European Union does not increase housing problem we already have. Even if prices fall, there is a risk to the governmental plans to build one million homes by 2020.  Across the UK, nearly 12% of the 2.1 million construction workers come from abroad: if we want the property market to succeed, there will have to be houses to buy in the first place. Decreasing immigration and skilled workers, who are building many new homes, would completely hinder this goal.

The overall conclusion for Brexit and the property market is that property prices will most likely fall.  In theory, this means more first-time buyers will be able to afford to buy a house, however, with interest rates and higher mortgages this may not be the case.  Similarly, lower housing costs may also appeal to other foreign buyers because their money can go further. When sterling plummeted during the financial crisis, the London market boomed because foreign investors flooded in and bought up property in prime central postcodes at relatively cheap prices. (11)

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Statistical forecasts can often be wrong, and they are quite often based on assumptions. The swing voters and instability in the opinion of Britain as a whole could leave the referendum either way.  Significantly, the BBC claims ‘The minimum period after a vote to leave would be two years’ and so we may not see the immediate impact on the country as a whole for quite a considerable time. (12)

The truth of the referendum is that we cannot know for sure what the consequences will be either way if we leave the EU.  Martin Lewis, the popular financial expert, has previously stated that a vote for Brexit ‘is unquestionably economically riskier than a vote to remain. But, he adds, ‘don’t necessarily read risk as a bad thing’. (13)

The Heaton Group specialise in the development of high-quality homes of multiple occupancies  (HMOs) in Greater Manchester and surrounding areas. If you would like to know more about our most recent opportunities, please don't hesitate to contact one of our experts.  

Sources:

1. Financial Times - Brexit Polling

2. IBT - EU referendum: What a Brexit means for the residential property market in the UK

3. The Journal - Property Prices Rental and Houses 2016

4. The Guardian - House prices could fall by 18% if Britain quits EU, says George Osborne

5. The Telegraph - George Osborne: A Brexit could see the value of homes fall by a fifth

6. IBT - EU referendum: What a Brexit means for the residential property market in the UK

7. The Guardian - House prices could fall by 18% if Britain quits EU, says George Osborne

8. Economics Help - Disadvantages to EU Membership

9. The Guardian - House prices could fall by 18% if Britain quits EU, says George Osborne

10. Economics Help - Impact of Immigration on UK Economy

11. IBT - EU referendum: What a Brexit means for the residential property market in the UK

12. BBC News - The UK's EU referendum: All you need to know

13. Independent - EU referendum: Financial expert Martin Lewis backs Remain, but urges voters to make up their own minds

14. EU Flag provided by MPD01605 on Flickr

15. Union Jack Flag provided by Sarah Joy on Flickr

16. Overlayed EU Flag provided by Descrier on Flickr

 


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