Today’s Conveyancer Feature: Brexit and the Property Market
Brexit talks are to enter the second stage of negotiation following an announcement made in Brussels earlier today.
During a press conference this morning, the President of the European Commission and the UK Prime Minister announced that a deal had been struck with the European Union, and Brexit negotiations would now move on to trade. Whilst both Jean-Claude Juncker and Theresa May described the negotiations as difficult, they agreed that reaching the decision had been down to compromise on both sides.
However, though it clearly marks progress for Britain, it’s important to acknowledge the resulting impact of these ongoing negotiations – most notably on the domestic markets.
In one sense, the deal brings relief and even stability – finally, we have a degree of clarification and can move on to trade talks – but at the same time, the decision marks the beginning of another cycle of uncertainty; something which has impacted the UK on a significant scale.
Whether the fluctuation was observed in the economic, political or property market, reports tended to point to June’s referendum and the UK’s decision to depart the European Union.
Though it may be clear that ‘Brexit’ has been a contested issue over the past 18 months, how much of this impact can really be attributed to the choice made on June 23rd?
This article will look back at the property market over the past year and a half, exploring both the speculation and impact accredited to Brexit, most notably in regard to uncertainty.
It will also include predictions of industry experts during the run-up to the referendum, as well as after the decision to leave was made.
Rewinding to May 2016, transaction figures in April saw a drop of over 100,000. Statistics released by HM Revenue & Customs saw total residential transactions over £40,000 fall from 73,430 in March to 70,690 in April. Andy Sommerville, Director of Search Acumen, questioned whether this drop could be down to people ‘trying to find their bearings’ as speculation surrounding Brexit ‘grows louder’.
Whilst the transaction volumes in May 2016 saw a slight uplift of 10,000 month-on-month, they were still significantly lower than the amount recorded in the previous year. This sparked further speculation surrounding uncertainty, with My Home Move’s Doug Crawford citing the ‘looming EU referendum’ as a possible reason for prospective movers to avoid the risk for the time being.
In June, forecasts were flat, with accountancy firm KPMG predicting 2017 would see an even further fall in house prices outside London. Warning of the impact of negative speculation, Broker Conveyancing’s Harpal Singh stated: “The main fear now is fear itself. If people believe the negative forecasts then we will realise their fears – that house transactions will fall through, new purchases will slow down and property prices will come down.”
However, with the referendum very much in sight, headlines were saturated in forecasts and predictions, naturally leading to a consequential effect on consumer market confidence.
After the decision did come to light, changes across the markets did occur – some more dramatic than others. Whilst the pound’s fall can almost certainly be attributed to the decision to leave, the resulting impact on the property market is less clear. As opposed to the threat of ‘Brexit’ in isolation, were the after effects paired with pre, as well as post speculation?
The RICS report during this month saw buyer demand drop at the fastest rate since 2008’s financial crisis, with the first short-term price drop expected since 2012.
Whilst this was mainly met with negativity, Andy Somerville did highlight the potential effect on affordability, and how he expected the government to feel.
“The government must be slightly startled that the possibility of a Brexit is engineering, for a very brief window, what it wanted to achieve along – greater affordability in housing. Fear, whether it’s rational or not, is driving the housing market, with prices in the capital already dipping downward, potentially due to overseas investors halting activity and regular citizens choosing to sit still until they’re on firmer ground.
In the month following, figures indicated that underlying house prices were starting to slow, with the annual growth rate dropping to the lowest point since July 2015. However, wider factors such as low interest rates and minimal supply meant that prices were still rising. Katherine Binns, Research Director at HomeOwners Alliance, doubted the real difference that Brexit would make in light of these factors, stating: “House prices are less likely to be affected by Brexit than they were by the 2007 financial crisis.”
Whilst HMRC figures released in July showed a yearly decline, their report for June showed a 21.2% growth in transactions since May. Doug Crawford took the view that the figures showed a market in recovery, with the rise indicating that “the property market [had] mostly shook off the uncertainty from the Brexit referendum at the end of the month.”
In contrast, July’s RICS report was less optimistic, with the survey showing that new sales listings had seen the sharpest decline on record. The NAEA report painted a similar picture, with demand for residential property dropping by 35% year-on-year. Managing Director Mark Hayward did highlight that this was to be expected, however, especially in the immediate period following the decision to leave. “We are optimistic that the housing market will spring back into full swing in the coming months.”
In the following two months, this prediction seemed to become some sort of reality – at least, in the superficial sense.
Reports in August indicated that Quarter 2 saw the second highest level of non-residential transaction volumes in eight years, with many taking the view that the commercial market seemed largely unaffected by the referendum decision.
Whilst there was regional variation, reports in September showed an increase in buyer demand for the first time in seven months – a change which Andy Somerville highlighted as an indicator that the “storm in the housing market was settling.”
However, September’s Land Registry transaction data showed a fall on both a yearly and monthly basis, indicating the ongoing uncertainty among prospective home movers.
Whilst he drew attention to the need for push market confidence, Search Acumen’s Andy Somerville also mentioned a ‘silver-lining’ of the transaction decline, stating “that businesses have the time to take a long hard look at their internal processes and how efficient they are. Doing so now could pay off in busier, or possibly leaner, times ahead.”
Though transactions did witness a fall during the final months of the year, figures from NAEA Propertymark showed an uplift in the proportion of sales made to first-time buyers. As well as indicating that the impact of the referendum result was having a minimal effect on those trying to access the property ladder, NAEA also stated that it was a sign of the housing market bouncing back.
The start of the new year appeared to harness this sense of optimism, with research from housebuilder Persimmon indicating a rise in revenues and average selling prices.
This was similarly echoed in property supply statistics, with HouseSimple’s Property Supply indicating a significant increase during the first month of 2017. The uplift was described by CEO Alex Gosling as a ‘relief’ for many, and in contrast to the concerns “that sellers, jaded by Brexit talk, might be slow to market in January.”
Where growth in house prices was concerned, the outlook remained more muted, with Nationwide statistics showing January’s annual growth rate falling to 4.3% – the lowest level since November 2015. Chief Executive Robert Gardener predicted that paired with weaker investment and rising inflation, the market could soften even further.
This view was largely echoed by the vast majority of the conveyancing community, with 83% placing Brexit as one of the key factors to influence the industry during 2017. Despite the results of the Groundsure survey, Managing Director Dan Montagnani highlighted that the monthly statistics did not support the perceived impact on transaction volumes. Instead, he attributed the consistently low levels to the Stamp Duty Land Tax reform – also a factor which conveyancers cited as influential during 2017.
Following the NAEA statistics from December, first-time buyer activity saw a further uplift in February, with a yearly increase to 36% from 28%. John Bagshaw, Corporate services director of Connells Survey & Valuation, attributed this to the low mortgage rates, which paired with low buy-to-let figures provided them “with an ideal opportunity to take their first step onto the ladder.”
Whilst the number of transactions during April saw a decline, this was modest – month-on-month, the estimated drop was just 3.2%, with May seeing a similarly subdued fall of 3.3%.
At this point, however, market uncertainty had been sparked once again by the announcement of a snap election set to take place in June. According to Mrs May, the aim of this would be to form a more solid political foundation to ensure a more stable Brexit.
Seeming to mirror the speculation prior to the referendum in June 2016, industry experts shared their views on the potential impact, agreeing that it was likely to further slow the housing market activity. This, they stated, would simply add to the existing market uncertainty and reduce consumer confidence.
Largely speaking, the run-up to and the after effects of the election stuck closely to the market fluctuations observed in regard to the referendum.
Following a result which was largely unexpected by the polls, demand and supply dropped as people waited for that prolonged period of uncertainty to subside.
So how much of this activity following June’s referendum really can be put down to the decision to leave the EU?
In short, it’s impossible to know. Of course, any kind of change is going to have some sort of effect on the property market, but whether it’s the speculation or the actual change itself is another story. It’s also incredibly difficult to identify how much impact is down to the market’s natural cycle; in other words, where does the natural supply drop end and the ‘Brexit induced’ supply drop begin?
Drawing on the difficulties in separating the sources of uncertainty was Paula Higgins. Speaking to Today’s Conveyancer, the Chief Executive of consumer group HomeOwners Alliance drew on the need for certainty before activity can see a significant uplift.
“So far, the doom and gloom forecasted by some commentators as a result of Brexit hasn’t materialised. Residential property transactions have been increasing every year for the past 5 years, but perhaps at a slower pace than some had hoped. Our research has showed that increasing numbers are staying put due to market conditions – with Brexit being one factor. Of the 7.5 million UK adults who have put off plans to move, one in six (15%) said that the Brexit vote was behind their decision. Yet one in four (25%) said that rising house prices, the increased cost of living and the difficulty in getting a mortgage were their top reasons for not moving.
“First time buyers and and those who already own a home are already choosing to play it safe in these uncertain times. With negotiations with Europe ongoing, this pattern is set to continue until the UK’s future relationship with Europe is more clearly defined. People putting off plans to buy or sell chokes housing supply and generates pent up demand. The housing market needs certainty in order to be able to function most efficiently.”
On the whole, whilst the market may have remained relatively resistant when compared to the anticipated impact, even the changes that have been attributed to June’s 2016 referendum may not be as negative as first predicted.
Commenting on the mortgage rate rise and potentially positive symptom of seller uncertainty was Simon Bath. The CEO of When You Move told Today’s Conveyancer: “A significant effect of Brexit was the Bank of England raising the base rate: the first rise in borrowing costs for a decade. This has obviously had a direct impact on mortgages, however, the increase only equates to monthly payments rising by around £12-22 per month for typical mortgages – not nearly as catastrophic as people first anticipated. This has been encouraging for conveyancers and mortgage intermediaries alike as buyers continue to search for the best deals.”
“While the market remains buoyant, some sellers have got cold feet in the wake of Brexit, particularly in and around London. This has led to some homeowners being more flexible with their sale prices, which if anything can be seen as a positive as it keeps the market moving and gives an opportunity for people who would otherwise be priced out to get on the property ladder.”
Though today marks a step towards establishing a clearer path for Britain’s future, the resulting impact of the Brexit negotiations are unlikely to be quite so straightforward. It is yet to be seen how consumers and the property market on the whole will react now that talks on trade can finally commence.