Is Osborne Right on Brexit and Property?

Naomi Heaton, CEO of LCP, Comments

With the UK’s EU referendum fast approaching, questions are inevitably circulating about how the build-up and outcome will impact upon property prices and the future of the UK and London market. Indeed, in a bid to sway voters, George Osborne came out yesterday to say that property prices will be significantly dampened by a UK vote to leave.

Osborne is correct that the property market does stall in the face of investor uncertainty. This is demonstrated in general election years. In Central London, this slowdown is traditionally equivalent to an average 15% reduction in transactions and was reflected during the 2015 general election where sales volumes fell 18%. All the evidence, however, suggests that markets rally thereafter, regardless of the outcome. In 2005, the last time Labour were elected into power, transactions fell a staggering 31% in the lead up to the election but bounced back 26% after the result. Similarly in 2015, despite the significant tax headwinds impacting the market, the pre-election fall was counteracted by an 8% increase in sales activity shortly afterwards.

Due to the delay in reporting time for property sales, which have 6 weeks to be registered through HM Land Registry, little information is currently available as to any hold back in sales this year due to uncertainty around the referendum. In fact, current available figures from the Council of Mortgage Lenders show that gross mortgage lending in Q1 was 60% higher than a year ago. This, however, is distorted by buyers beating the new Stamp Duty changes for additional properties which came into effect in April. This anomaly is likely to magnify any fall away in transactions pre-referendum, so figures will need to be treated with care.

Whilst a holding back in sales, akin to a general election, is anticipated and anecdotally palpable as the EU referendum debate heats up, the upshot is that now is an excellent time for investors to buy. A slightly softer market as Brexit uncertainty is compounded by the current tax headwinds offers plenty of opportunity.

Despite the expected softening in sales volumes from experts, there is a largely positive outlook for property prices from London homeowners. A recent survey by property portal, Zoopla, has shown that 94% are predicting double digit growth over the next six months.

Notwithstanding a change in buying behaviour, a slowdown in sales is not expected to have a marked knock on effect for property prices in Prime Central London. Investors here, with low dependency on mortgages, are unlikely to be forced to sell in times of economic uncertainty. During the global credit squeeze, transactions fell a staggering 70% as the crisis ensued but prices fell just 14% as investors preferred to hold onto their assets and await economic clarity. Prices bounced back to par in 2010, just one year later.

To capitalise on the current market conditions, purchases should be focused on the sub-£1m sector of the PCL market. This has been far less affected by recent tax changes and price growth is expected to continue to be robust. Last year, sales activity in this bracket increased 7.8% compared with an 8.6% fall over £5m.

Stay Outcome: In the event of a vote to remain, a return to the status quo and a hardening of prices is expected.  However, such an investor return is not always immediate, particularly in the face of the current tax environment. As with the 12 month lag during the Credit Crunch, a bounce back in transactions following a stay vote is not anticipated until next year.

Leave Outcome: As a global capital, directly affected by international, not domestic, concerns, Prime Central London property is probably most exposed to any future Brexit impacts. However, should the UK vote to leave, it has been suggested that there will also be a significant impact on the UK economy as a whole.

It is notable that the EU has only played a limited role in attracting international capital to the London property market.  According to LCP’s latest audit, only 12% of buyers are from Europe. An unlikely total withdrawal of this sector will have very little net effect on property prices as a whole.  Moreover, both Europeans and international investors outside Europe, are attracted by PCL’s reputation as a cultural, educational and financial centre, together with its rule of law, political and economic stability – all factors unaffected by a UK Brexit. From a property perspective, people will be attracted to this, whether or not the UK is a smaller power outside the European block.

Further currency devaluation should actually increase London’s attractiveness to international investors. This year, Brexit uncertainty has driven Sterling to lows not seen since the global credit squeeze.  USD denominated investors, such as those in the Middle East for example, have been enjoying discounts of almost 1/5, thereby cancelling out the cost of the new 3% additional Stamp Duty. Investment Bank Nomura has predicted a further 15% fall in the pound as a result of Brexit and this continued depreciation is likely augment the global attractiveness of PCL property further. Whilst property nationwide will not benefit from this currency move, it should create a tailwind for foreign buyers coming into PCL property, countering any of the tax headwinds.