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Safe as Houses?

Two years on and the “B-word” is still sticking around like a bad cold that we can’t shake off. Those considering a purchase or sale in the coming months must carry the burden of the uncertainty of the unknown mechanics of Britain’s departure from the EU. Will a good Brexit deal cause prices to surge? Will they plummet should Britain crash out without agreements in place?

The prospect of a no-deal Brexit on the cards means that only time will tell what impact this will have on the range of sectors that continue to grapple with this political uncertainty. The UK property market is no exception, and there has already been a noticeable stagnation in mobility as the possibility of a no-deal Brexit hangs over the market like an ominous rain cloud.

Unquestionably, both on a national and international level, the result of the Brexit negotiations are what will determine the housing market’s fate. At best, a hard-Brexit could mean a rise in mortgage interest rates and stressed affordability.  At worst, a price-crash would be driven by rising unemployment, depressed economic growth and higher inflation.  Prices may just come down more, but if you’re a first time buyer trying to get into the market, the lenders may not be willing to give you a chance.

Leaving aside the potential impact itself of the UK leaving the EU, the fervour surrounding the Brexit process and its disruptiveness has caused buyers and sellers in the residential property sector to sit tight in increasing numbers. It may well be the case that if you think that the housing market foundations are shaky now then what do we have in store in the near future?   Still, trying to sum up the health of the property market for 2019 is impossible on any level and many are of the view that whichever way Brexit goes, the UK is still a stable country in comparison to many other countries in Europe and beyond, and a safer and more attractive investment than in many investors’ home countries.

In trying to rationalise this madness what does shine through is that generally people love the country because it is safe and economically stable and Britain is unlikely to lose its lustre. A definitive end to all of the chaos will hopefully mean a surge in investment and to the UK economy.  Britain still remains the home to a great deal of prestigious universities and private schools, many of which are world class attracting international students from all over the world, as well as the nucleus of the financial world.  In short, there are not many gateway cities that can provide the stability, liquidity and transparency that the UK provides.  This can certainly be said for London, where there has always been a palpable feeling that the capital’s property market will come out clean in the wash. 

Is it safe to say that the London’s property market is “B-word” proof? Despite British investors cooling on UK property front over the past year, foreign investment interest remains relatively strong. In recent years, overseas investment has largely been concentrated on London and the South-east areas and property here has seen the largest price increases of all.  There’s a feeling that it is still relatively cheap to buy for non-sterling buyers.  While the number of international buyers declined in the immediate aftermath of the UK vote to leave the EU, the level quickly recovered as sterling weakness gave overseas buyers a favourable exchange rate.

The fact that London has secured its position as the centre of the global economy means that it attracts global property investors from the Middle East, Russia and East Asia, and this not only serves to benefit the property market but also trickles down on the rest of the economy which is hugely beneficial. According to recent studies, the average prices across the UK have rocketed from an average of £70k in 1999 to an astounding £215k in 2014.  However, without the influx of the foreign cash this rise would only have seen a growth to £174k.   Needless to say the billions of pounds flowing into the country and invested into our bricks and mortar through foreign companies has inflated prices by at least 28%. 

However, London’s residential and commercial property market is not immune to the problems Brexit poses. A drop in London’s relevance as a financial centre is certainly weighing on its market valuation.  In spite of the fact that last 5 years hold a record high of overseas investors snapping up homes in the most exclusive areas of London, certainly the number of foreign buyers investing in the capital’s property market has taken a slump more recently, and remained there ever since. It is reported that the effects of a Brexit no deal, or a so-called “disorderly Brexit” could mean that house prices fall by up to 30%. A ‘good’ deal, a ‘soft’ or relatively undisruptive Brexit could see some recovery in the economy. 

With Brexit aside it can be argued that overseas investment has indeed had a direct impact on the housing crisis and on the reduction in national homeownership. Studies suggest that foreign investment not only raises the price of expensive homes, but carries a ripple effect, thus pricing millions of people in the UK out of the property market, thus giving rise to housing shortages.  Conversely, 2018 saw the biggest drop in EU nationals working in Britain since records began, and it has been reported that EU migration to Britain has fallen to its lowest since 2012.  Does this mean, that fewer EU nationals working in the country means a lower demand for residential property, freeing up more homes?  European buyers have been decreasing in the total sales figures since the EU referendum dropping from nearly a quarter in 2016 to a tenth in 2017.

Outside of the realms of London, it has been reported that through 2018 the UK housing market was “subdued” with reports that homes in big cities and major towns were on the market for longer than in 2017 before being sold or under offer and also that exchanges were taking longer to secure. With uncertainty lingering in the air, the expectation is that nothing much will improve going into 2019, until the economy can offer further security.  For those considering whether now is the moment to buy, these are challenging times with as many different markets in one city as there are across the country.  It would appear that this subdued market is giving rise to owners taking the “safety-approach” by deciding not to move and take on bigger mortgages and to stay put and to take advantage of historically low home loan rates and reduce their overall level of debt.  Strict lending controls, issues with affordability and lack of secure employment do not aid the situation, especially first time buyers.  It would appear that existing homeowners with mortgages see little reason to move with mortgage affordability rules remaining tight and curtailed by stringent “stress tests” demanded by regulators. 

We know that buy-to-let investors have been hemmed in by a series of tax and regulatory changes that have hit profits and raised the cost of investment. A huge hit has been the loss of the higher rate tax relief on their mortgage interest which is being eradicated in stages and being cut altogether in 2020.  These coupled with the higher rate stamp duty in the form of a three percentage surcharge to all “second property” homeowners has served as a hit to the investor property market.  In spite of seeing an almost irradiated buy-to-let market, there still remain a small percentage of mostly retired buyers wishing to invest savings on second properties that offer a pension-style income stream delivering a monthly cash flow from a property, rather than the investors who work to benefit from earnings growth in this type of investment.  

The wave of insecurity brought about by Brexit has made for a political tension in the UK that is not the norm. Predicting the UK housing market in the current climate is a tough call.  On the other hand of course, there is the school of thought that today’s lack of surety in the market offers precisely the conditions in which canny purchasers can find opportunities to strike a property bargain. It does seem that the difficulty of finding the right price in this climate brings with it interesting developments in how homeowners are marketing their homes. Sellers are fearing putting their house on the market at the wrong level, a price pitched too low, or a price pitched too high igniting very little interest and as a result vendors are turning to “off-market sales” some even appearing on sites such as Facebook.  This is why it is vital to source a good local surveyor and estate agent would assure fairness and the best possible outcome for the consumer.

It seems that there is a case for cautious optimism. While the market is showing signs of distress at this time, we should remain optimistic that the effects are not permanent and that Britain’s allure will not be subsiding completely anytime soon.

Sylvia Garcia

Associate Solicitor