Brexit: is an uncertain future an opportunity for investors or a time to hold back? Property analyst Kate Faulkner discusses the ins and outs of Brexit, property and if there's opportunities to be had for property investors.
It is with no doubt that all eyes are on the UK following on from the EU Referendum vote on 24th June, today, property analyst Kate Faulkner discusses the ins and outs of Brexit, property and if there’s opportunities to be had for property investors.
It’s clear that very few people expected us to ‘crash out’ of the European Union following on from the referendum. Many had talked about market volatility and a growth in uncertainty as being one of the dangers of voting to leave and that’s pretty much been the result so far!
From my perspective and for property markets across the UK, it doesn’t matter who voted which way, the very fact that the majority have voted out will have an impact.
Although predictions for the property market aren’t always particularly accurate and none of us has a crystal ball, we can look at what’s happened in the past when we’ve had other ‘shocks’ to our system. This kind of analysis can help answer some of the big questions all investors and landlords should be asking at the moment: what will the decision to leave the EU mean for the property market, immediately and in the future?
Two-tier property reactions
In the property market, I typically see two reactions. The first is that buyers tend to hold back – and that includes investors as well as first time buyers and those trading up and down - which tends to slow property price growth and at worst, flatten it. As there are always some people who are desperate to sell their property, a weak market like this can throw up the odd property bargain for buyers. The question to ask here is whether you can afford to buy and hold in this new uncertain world, when we don’t even know how long the uncertainty will last.
The second reaction tends to be much more dramatic.
In January 2007, before the credit crunch hit the UK, property prices were recorded as rising by 10.49% year on year, with an average price of £177,261 and 94,430 property sales during the month. By August, people started to realise there was a major problem brewing, but prices continued to rise until they reached a high of £190,032 in September of that year, maintaining a 10.01% increase year on year.
But, by October the market had gone into reverse and prices began to fall - albeit not by much at that time, only to £189,589. However, six months later, all the bad news and fears of a full economic recession had hit hard and the average house price had fallen to just £155,852 by April 2008, down by nearly 18%. Worse still, the number of people buying homes in that month was just 46,154, half the number of transactions carried out 18 months earlier. This fall in housing sales helped to contribute to the economic recession because people spend a lot of money when they move, which they don’t tend to do when staying put.
The latest statistics from the Land Registry’s new UK property index shows our average house price has recovered to £209,054. So, after nine years, average prices are 10% higher than the peak achieved before the last recession hit and there has been an astonishing 34% increase in just eight years for those that bought at the low of the market in April 2008.
Economic issues can damage the property market further
We know from previous economic downturns that prices can fall by an average of 18% and that there can be some good returns for those that buy at a market low, provided you can survive the downsides and risks of an economic shock.
Before the Brexit result was announced, interest rates were expected to stay at the 0.5% level they have been since the credit crunch and remain there through to 2019. However, one of the biggest fears now is whether something will cause interest rates to rise, which would reduce buyer demand further, as the cost of buying and owning would be driven up.
However, a rise in the base interest rate is not the only thing that can cause mortgage rates to rise. Even if the base rate were to stay the same or go down, if banks suffer heavy falls in their share price and see a perceived increase in the risk of house prices falling, the cost of a mortgage could still increase – unless, of course, you’re on a fixed-rate deal, which doesn’t allow the lender the raise their rates.
The good news is most of the current predictions say that, in order to help save the economy from falling into another recession, interest rates may well go down and, provided bank shares recover from their initial falls, fixed rates and future mortgage costs may well be reduced – just as they were during the credit crunch.
Where does supply and demand for property fit into this?
Whether you see price rises fall, flatten or go into reverse in your area will depend on what’s happening at a very local level. It may well be that the demand for flats in your area falls well below the supply of those on the market and this will drive property prices down for those flats. It could be that one-bed flats suffer this fate, but two-bed flats remain in short supply versus demand, in which case there might not be any impact on prices, people might just take longer to make offers.
And it’s these national versus local factors that will influence whether the uncertainty we’re currently experiencing will be an opportunity for you as an investor to get hold of a bargain, or a risk that means it’s worth holding back to see if the economic situation worsens and prices dip further.
Don’t forget politics!
Whatever happens to the property market, we are all now acutely aware that profits from property depend on what taxes we all have to pay. So remember to factor into your financial analysis of any property deal those changes that the Government has recently made: higher-rate stamp duty, removal of the automatic 10% wear and tear allowance and the phased reduction of mortgage interest relief to 20%, beginning next year.
Opportunity or risk?
As ever, whether now is a good time to invest or not will depend on your personal circumstances, what’s happening at a local level and what individual deals come up. The important thing to do now is make sure you seek good advice from local experts. Talk to an independent mortgage broker, keep in touch with your local Belvoir buy to let expert and make sure you speak to wealth management and property tax experts to ensure any investment in property is the right thing for you at this time.