There is much talk at the moment about Brexit, with all sorts of claims being made, so if you are a property investor or own Buy-to-Let as a landlord, how might Brexit affect property in the long term?
To best answer this question, it’s important we get our heads around the ways in which even talk of Brexit can affect the UK property market. It can impact on three main fronts:
This is one of the most critical influences on the property market. The slightest change can send buyers – and sellers – into panic or ‘shut down’ mode, and we’ve already seen this happen this year. The 3% increase in stamp duty for second homes and investment properties has led to one of the biggest reactions the market has ever seen, driving up purchases and prices so much in March that there is now talk of property stock being so low, first-time buyers are struggling to find property to buy.
However, now the latest news from the Halifax Housing Market Confidence Tracker suggests: “the UK housing market is at its lowest level in over a year. The latest fall comes after a downward trend since a high point in May 2015, and comes as consumers feel increasingly uncertain about the wider economy.”
So all the reports of Brexit and the uncertainty it is creating can clearly result in people’s confidence being damaged. From a property perspective, that can lead to two reactions. People will either rush to buy before the vote on June 23rd, boosting the market, or wait to see what happens in the months afterwards, potentially causing the market to slide in the meantime.
The success or failure of the property market, be it sales or letting, relies on people’s wealth and access to finance. Rents typically move in line with wages, so the higher wages go, the more tenants can afford to pay. Prices, on the other hand, are reliant on people’s confidence to buy or sell, as mentioned above, and on their ability to access finance through the likes of mortgages.
During the years following the credit crunch, rents didn’t rise that much in the private sector and in many cases actually fell for a period of time. This was partly due to more property coming into the rental sector, but mainly due to the fact that wages were being squeezed so that in ‘real terms’, i.e. when taking inflation into account, affordability fell. But now that wages are rising above inflation once again, rents are starting to go up too.
From a price perspective, people’s confidence was knocked enormously during the recession, but the limits on funding due to the horrendous credit crunch meant that people couldn’t readily access funds for mortgages to buy property during this time too.
The fear of Brexit is that it will cause uncertainty – and to some extent it already has – the consequence of which could be the loss of jobs and wages not continuing to increase as they have to date.
Already the likes of the CBI have downgraded their economic growth forecasts for this year to around 2%, versus the 2.3% previously expected. Although this isn’t entirely down to Brexit, their view is that, whether we stay in or leave, “Brexit uncertainty was having a “tangible impact” on spending plans” by companies, which in itself takes money out of the economy.
So if Brexit causes the economy to falter, it’s likely to impact negatively. This doesn’t necessarily mean property prices or rents will fall; what it does mean is that demand for property is likely to be lower (if migration falls) and if the economy doesn’t perform well, wages may stagnate. That would make it more difficult for prices and rents to rise, potentially reducing investor returns.
Impact on mortgage rates
One of the fears of Brexit, which has been put out there by those who want to remain, is that mortgage rates may rise. The Chancellor has made it clear that he believes interest rates will have to go up if we leave the European Union, and mortgage rates are likely to follow.
The good news is that this isn’t a widely held view. In fact, according to an article in Mortgage Strategy, most of the mortgage experts don’t think it will make much of a difference. The view of both the Council of Mortgage Lenders and Building Societies Association is that the housing market will still be here whether we exit the EU or not and that, with our global financial links, we will be okay.
Bearing all this in mind, what is the likely result of Brexit for the property market?
The reality is, no-one really knows. It is such an unpredictable event, the only thing we do know is that a vote to leave would cause an immediate uncertainty and that’s a state which would probably continue for some time. Companies and people will gradually make their own decision on how to react, so we simply won’t know the impact until that has happened.
However, here are some views of the long-term impact of Brexit:
On the economy…
“Once the arrangements had settled down, [a] new lower exchange rate would make the UK look rather more attractive, most of the lost GDP would be recovered and quite likely the economy would settle on a slightly faster growth path.” Centre for Economics and Business Research (CEBR)
“It is plausible that Brexit could have a modest negative impact on growth and job creation. But it is slightly more plausible that the net impacts will be modestly positive.” Capital Economics
On demand, supply and rents
A recent report from National Association of Estate Agents (NAEA) and Association of Residential Letting Agents (ARLA), together with the CEBR, suggests that demand will reduce in the long term but a potential skills shortage could also reduce our ability to build new homes, lowering both demand and supply.
The rental market in some areas could see a downward pressure on rents due to lower migration. David Cox, Managing Director of ARLA, said: “The fact that rent costs would face downward pressure is both a blessing and a curse. While renters should face fair and reasonable prices, landlords need to be able to at least break even on any outgoings they have, such as a mortgage. If demand eases to such an extent that landlords cannot recuperate costs, we’ll likely see a mass exit from the market, which would then just have the opposite effect on demand as supply falls – and we’d be back to square one.”
Overall, some experts are concluding a Brexit would cause prices to fall, while others are saying it would have little or no impact.
In reality, we won’t know for a while; all I know is that, as ever, people and the property market will find their way.