578: Brexit Aftershocks for Property Investors - Trends
After-Shocks: After the initial Brexit shock, the UK economy seems to have notched down a gear in activity levels. Just prior to the Referendum then economy was booming, particularly in London and southern England. We had a goldilocks scenario of low interest rates, low inflation, strong Sterling, financial confidence, strong employment growth, strong inward migration and a booming service economy in London.
Shock: All this changed in a stroke at around 1.30am 24 June, confidence has waned, Sterling dropped sharply, inflationary pressures are building, the interest rates have been dropped and house prices in London have started to fall in most areas – particularly for prime central London property. The vestiges of the “Ripple effect” is still fanning out across the country, but it is uncertain how long this will last.
Hangover: What is clear is that the 23 June started a prolong period of uncertainty – and businesses hate uncertainty. This will almost certainly translate into slower GDP growth, lower tax receipts, increasing deficits and pressure on Sterling.
Employment: Employment has continued to be strong – though many of these jobs are poorly paid lower end services job – and half of these are being filled by migrants seeking work from overseas and mainly Europe. Retail spending has held up well – but many thing this is because people are dashing to buy things before prices rise plus an influx of foreigners on holiday buying things in Sterling for 20% less than a few months ago.
No Crash Yet: For the time being, it does not really look like an “economic crash” or “property price crash” as such – just a big re-adjustment to slower growth and/or stagnation. But we have to warn – this sets the scene for the next few years. Endless EU negotiations starting probably end 2017 for 2-4 years will dent confidence and business investment. Many banks will start to transfer employees to mainland Europe – particularly if the negotiations don’t go well. This will affect the London property prices – and indirectly property prices in the rest of the UK.
Property Price Support: However, a few things will work in the favour of supporting property prices during this turmoil – which are worth listing:
· Booming population – as fertility rates increase in part triggered by larger migrant families and their fertility rates (this trend start around 2003)
· Lack of investment in housing – also because of the uncertainties caused by Brexit
· Lack of investment in buy-to-let properties – caused by the draconian new taxes on buy to let landlords
· Lower interest rates caused by the economic slowdown as a fall out from Brexit
· Decline in Sterling value by 20% in the last year – making London property prices 20% cheaper for overseas investors
· UK and London’s continued status as a safe haven offshore location – albeit this is under threat from Brexit
· Pent up demand from 25 to 45 year olds - who have delayed buying a property for the last 8 years after the financial crash of late 2008.
· Moderate affordability levels in many parts of the UK for couples with two jobs
· British people’s desire to own their own home – along with migrants that decide to stay in the UK – also wanting to own their own homes
· Help to buy schemes that encourage home ownership
· Lack of long term tenancy agreements making for insecure tenure for families staying in rental properties, encouraging home ownership
· Government and Bank of England support for high street banks lending/mortgages - as a key part of keep economic momentum and winning votes for the next election
Encouraging Demand: These aspects should drive demand and suppress supply and hence support property prices in years to come. As long as employment continues to stay strong, and unemployment does not rise markedly – we don’t see a property price crash occurring. We expect to see the trend continuing of people being required to give a high proportion of their earning to service property – as demand continues to outstrip supply. What we are likely to see is some areas like the outskirts of London, Manchester and Leeds performing quite well, with other remoter areas well away from the population and employment boom areas languishing – staying depressed (e.g. Barmouth mid Wales, Barrow-in-Furness NW England, Cumbria/NE England).
Economic Slowdown: For the property investor, the assumption is that Brexit will occur – it will take five years – and be problematical and lead to lower GDP growth and Sterling decline with an old fashioned dose of inflation – prices in shops will rise because import costs rise. Wages will not keep up with inflation and hence another dose of “stagflation” that will make the poor even poorer and the middle class depressed – whilst not particularly effecting the rich. Same old story.
Disciplined Investment: In such an environment, it is even more important to be disciplines with investment decisions. No property should be purchased unless it is in an area that:
· Is positive changing because of either new business, infra-structure or communications
· Has improving employment prospects – preferably high paid jobs
· Is in a regenerating area
· Has good access to schools, hospitals, culture, universities, retail etc
In the 2-10 year time frame, we think Acton (Crossrail) and Shoreditch (Hi-tech start-ups) look very good for Victorian properties in quiet streets, as more high paid people move in. An already well established area is Farringdon in central London – this has got to be a winner – because of the huge amount of jobs all around and the new Crossrail station being the cross between Crossrail and Thameslink, plus the tube lines coming through this junction. Perfect for tourists, pied-de-terre, city slicker crash pad plus wealth families that want a central flat or house.
Ripple Continues in Certain Areas: Despite Brexit, some areas are lagging so far behind West London prices that even when Kensington prices dip – we still might find prices in Leytonstone, Ilford, Catford and Romford continuing to climb for the next year or so. This is also true of places like Luton and Slough – some of the areas that are still affordable with reasonable communications to London.
Tories – Careful Spending: One ray of good fortune is that at least we have a government with a majority that is committed to at least trying to keep the UK finances on the straight and narrow. And conversely the opposition is in dis-array and looks unlikely to have the capability, organisation and backing to mount any meaningful challenge to the Tories for the foreseeable future. This should at least help the UK finances and prevent a repeat of mis-spending of the Brown Treasury era from 1997 to 2010.
Supply and Demand Shortfall: The uncertain investment climate and threat to house prices plus the draconian buy-to-let taxation that Chancellor Osbourne put in place just before he left will all play their part in reducing buy to let investment in the next few years. However, we expect inward migration levels to stay similar to pre-referendum levels – namely a net 320,000 new people a year and an overall UK population increase of around 520,000 a year for the next 3 years. This will mean huge pressures on rental properties – rents will have to rise as demand outstrips supply. This is the unintended consequence of the ridiculous new taxes – that actually tax losses – crazy. They render many buy-to-let businesses sub-economic. As landlords slowly release properties – the rental crisis will worsen, unless the government does a U-turn on these tax increases – which is very unlikely in our view.
Brexit Scenarios: Regarding Brexit, it’s worth pointing out there is of course a very high chance of a Brexit, but watch out for the legal challenge on Brexit. This challenge is likely to go to the UK Supreme court. In summary, it argues that the Prime Minister cannot sign the Article 50 notification to start Brexit without a vote in Parliament. We think they have a very good case. If it does go to the UK Supreme Court, then the plaintiffs win, it would then likely be referred to the European Supreme Court and thence we would be in an unusual position of this court deciding whether we need to vote in our parliament – some might call this a conflict of interest since its highly likely the people in the European Court would want the UK to stay. Its though about 60% of MPs would still vote not to enact the Article 50. Anyway, the main point is that it is not a foregone conclusion that the UK will Brexit.
Another Referendum: Another argument is – surely there should be a second Referendum once a deal is negotiated – did the advisory referendum really mean Brexit at all cost regardless of the deal struck?
General Election: Another possibility is that a General Election is called – either on a Brexit case or a Remain case – this would of course make it clear what the UK wants. It’s certainly seems strange that an advisory Brexit referendum – that is split 52%/48% should lead to a definitely immediate exit.
U-Turn Possibility: In any case, the UK government is not prepared for any negotiations – and many European countries are holding General Elections next year – so we doubt the Article 50 will be issued before June 2017 – thence there is the two-year period. But some legal people even believe the UK can U-turn on the Article 50 at any time – opt back in on the same terms. If this is the case, maybe we could see what deal is struck, then hold a second referendum on whether we like the deal or not, then if we don’t, opt back in.
Uncertainty and Lack of Building: Okay, you are probably getting frustrated now – the point is – there are quite a few outcomes to this Brexit business and we really cannot predict how it’s going to turn out – which comes back to our original point – that this will affect levels confidence and hence levels of building (low), investment (lower), confidence (low) and Sterling’s value (low). Perversely, demand of property will likely well outstrip supply because building will grind to a halt from already low levels.
Gigantic Shortfall on Horizon: Hence our prediction is that in the period 2017-2018 – each year there will be only 125,000 new homes built but 520,000 additional people swelling the UK’s population and an actual requirement for something like 330,000 new homes year. That’s 205,000 new properties short each year – that’s 1,000,000 properties short in 5 years. Way under supplied – meaning prices should stay high and not “crash” as long as mortgage rates stay low and employment stays high.
We hope this Newsletter has helped give some usual insights for your property investment decisions in this uncertain environment. If you have any comments or queries, please contact us on firstname.lastname@example.org