Home Finance Brexit Vote: Does it Affect the UK’s Property Market?

Brexit Vote: Does it Affect the UK’s Property Market?

by Brad S. Muller
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The world watched wide-eyed as Britain voted to exit EU. A game changer indeed, many sectors were affected. Real Estate or the Property market was not left behind. Uncertainty continues to loom large over Britain.

Impact Analysis

London’s property prices seem to be affected, it was already facing a tough time with price escalation due to the demand-supply gap. With the uncertainty, the demand has outstripped supply, which has propelled the prices even higher. It looks like a bubble waiting to burst sometime soon.
The sales volume in the last year already saw a dip. Historic data suggests that there could be a further dip of ~20% in sales volume due to any external frictions. Lenders are also growing increasingly cautious. The lower interest rates had further pushed the demand. With supply getting stiff and the political uncertainty, the property prices in Britain have seen a downtrend.
Although the base rate is likely to be cut further, lenders may increase the mortgage rates further as a means to control their leverage pattern.

UK’s property market

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The UK’s commercial property market was valued at £787 billion in 2014. The commercial property stock is 10% of national net worth. About 12% of the UK’s net worth is represented by the privately rented residential property. 13% of the UK’s buildings are Commercial property accounts.
Residential property is over six times greater than the commercial property value. The private rented residential property is predominantly owned by small landlords. Over the years, professional players, institutions and corporate real estate players are showing interest. It is now being considered as a subsector of commercial property.

Housing property market in the UK

There are multiple aspects which threaten the UK’s housing market. There is an increasing demand-supply gap. The prices have been increasing over the years’, it seems like the valuations are getting too stretched. Analysts are suggesting that it is looking like a bubble ready to burst.
The prices have risen by close to 12% in the first quarter of 2016 in areas such as the Outer Metropolitan around London. This is the highest rise; this is followed by 11.2% rise in London, 8% in Outer South East, ~5.5% in South West and East England.
The uncertainty of the political environment has ended with the Britain voting to exit the EU. Although it continues to be little hazy, there could be reformative policies and some stringent tax laws which may bring this steady uptrend to some moderation.
Recently, the buy-to-let stamp duty surcharges were increased by 3%, this has been effective since April 2016. This has become a deterrent for many buyers, who were contemplating residential investments. This has increased the already high stamp-duty.

Future trends in the UK housing market

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Britain is bracing itself for some stringent anti-money laundering regulations. It has already initiated actions against foreign property owners after the revelation of Panama papers. London property market seems to be dirty money destination. Britain is taking steps to come clean from such reputation.
The Housing association tenant has planned a 1.5 million extension of the right-to-buy at highly discounted prices. The lower end housing market is likely to see some significant increase in demand.
According to a recent survey conducted by RICS (A UK residential market survey report), the housing property prices around Central London have seen a fall. This trend is likely to continue over the rest of this year (2016).

Propellers and Risks for housing market price increase

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The opinion amongst analysts is divided. There are few triggers which are likely to propel the property prices. At the same times, there are factors which will pull down the prices

Despite high price to income ratios, UK’s house prices are likely to be propelled by these factors:

• Increase in money supply due to quantitative easing, lower interest rates
• Population growth and Immigration increases demand
• Construction activity likely to see the considerable increase over the year
• Increased regulatory reforms to increase transparency
• Boost to lower housing property market

The factors which will remain risks for the UK’s housing property market are –

• Regulatory reforms around foreign ownership of UK properties as revealed by Panama Papers
• Brexit’s weak cues and volatile financial markets have created the uncertain business environment
• Lending rates may not be conducive
• Increase in stamp duty would also be a deterrent
• Demand-supply gap

In the short-medium term, there could be the sharp decline in housing prices; this would provide a good opportunity for investment. In the long term, there are factors which may keep this market on an uptrend.

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