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8 May 2019

What Does The Future Hold For British Property Investment?

Whether you’re a staunch remainer or avid Brexiteer, there’s no denying that the uncertainty around when the UK will leave the EU, and the terms under which it may happen, is causing property market jitters.

The current deadline for the UK to leave the EU is 31 October, although this has been repeatedly pushed back, so whether Brexit will really take place by then is uncertain.

The prime minister has so far failed to secure enough votes from MPs to push her deal through, but cross-party talks have restarted this week in a bid to break the deadlock.

What might a no-deal Brexit mean for house prices?

While MPs have repeatedly voted against the UK leaving the EU without a deal, the results are not legally binding. A no-deal Brexit remains the default position if an agreement cannot be reached between the UK and EU.

Many business leaders and financial experts have expressed concerns about the potential consequences of leaving without a deal.

In September 2018, Bank of England governor Mark Carney warned that leaving the EU without a deal could send house prices tumbling by a third, and in February this year he added that UK growth would be ‘guaranteed’ to fall in the event of a no-deal Brexit.

So, what does all of this mean for the property market? Here we take a closer look.

Last year was a good one for anyone who’d like to see some sanity injected into the UK’s housing market. By the end of 2018, house prices had risen by about 2.8% according to the Office for National Statistics data to November, or 1.3% using the Halifax price index for the year and just 0.5% using data from Nationwide.

With inflation (as measured by the Retail Price Index) at 2.7%, and more importantly, wages at above 3%, this means that house prices are flat or falling in “real” terms – ie, after inflation.

Why gently falling house prices are a good thing

British property owners have enjoyed a couple of decades of boom time. Using borrowed money to buy a property in Britain – ideally London – in the mid-to-late 1990s was a life-transforming financial decision for many people.

Every year, your house made much more money than you did. And if you were reasonably careful, that gain was tax-free, unlike your pay packet. So some people will question why it’s good news that prices are now flat or falling.

Home ownership has become a big political issue in the UK. Young people are fed up with being unable to afford to buy a place of their own, or having to live in fear of the whopping amounts of debt they need to take on to do so. Therefore, there’s a lot of anger, and a lot of desire for the government to “do something”.

A fall in house prices will hit the tax take. It will hit banks’ balance sheets. It will make people who own houses feel poorer and spend less. It will decrease labour mobility even further because people can’t move when they are in negative equity (ie, they owe more than their house is worth).

Naturally, this is a rather painful way of boosting affordability unless there is strong wage growth taking place at the same time. When more people are in a position to afford to buy a home, the banks’ balance sheets don’t get slaughtered and there is more sustainable traction in property markets.

Do economic indicators accurately reveal the status quo?

According to economic indicators in recent weeks, the UK is in the position right now where house prices are lagging behind wages. However, critics believe that the figures conceal a rising problem at the lowest end of the pay scale. A significant proportion of the British workforce is employed on zero hours contracts (ZHCs), which enable employers to hire people on an ad hoc basis. Despite figures showing the lowest unemployment rate in decades, there are considerably more people now classified as working who are not earning a living wage.

So what can we expect this year? Really, we think it’s more of the same. The crackdown on landlords is not ending any time soon, and that’s one of the key drivers of the shift in the market. Essentially, a big chunk of demand has been knocked out of the British property market which should make life that bit easier for standard residential buyers.

And with borrowing costs unlikely to fall any further, it’s hard to see where the impetus for prices to rise could come from. Equally, without a surge in borrowing costs or a nasty, job-shredding recession, then there won’t be a spike in forced sales, which indicates that price falls will be gentle.

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