Our London Research Department assesses the reaction within the property market following the vote to leave the European Union, as at 15th July 2016.
The result of the Referendum was announced three weeks ago and although it is too early to gauge any marked trend in the property market, the immediate response evidenced by our offices appears relatively moderate.
Caution among buyers, sellers and EU tenants stemming from the uncertain economic and political position of withdrawing from the EU, which was very obvious in the months leading up to the vote, still resonates in the Press. However, looking at new demand for residential property from applicants registering their interest in buying or renting across our London offices, we have not detected any notable downturn in demand following 23 June.
The graph below shows the weekly average for the past three months of applicant registrations including the three week period following the Referendum.
Among our London network of offices, there has been no significant fall in demand in the sales market which is relatively stable, just below its three month average. Demand for rental property started to gain momentum in the weeks leading up to the vote and has continued to increase since 23rd June.
The Sales Market
To help gauge pressure on house prices, we compare the proportion of those new entrants into the market registering interest to buy against those interested in selling. Our offices have seen a fairly steady ratio of three applicants to every seller over the past six months.
However, despite relatively steady demand, transaction numbers have fallen and the market is likely to see a continuation of the lower number of sales across London in 2016 compared with last year. That has and will continue to be most pronounced at the high end, which has a greater degree of price sensitivity with the market still adjusting to the Stamp Duty reforms. In the prime central regions where overseas demand is more significant, the value of the Pound Sterling has made buying UK property cheaper. For example, for the Indian Rupee or the United States Dollar, the Pound is currently 13% lower than on the day of the Referendum. This ‘discount’ should attract investors and those looking to buy in London, especially those holding a medium to long term view. Despite the uncertainty over the future of Britain’s trading position, London is still likely to retain its ‘safe haven’ status. It is seen as one of the world’s leading Capital cities where its history, diverse architecture, quality of life and overall appeal to the international community is unique. Significantly, London’s resilience to previous major economic downturns has been proven.
In the lower value and peripheral areas of London where demand for housing is more heavily influenced by mortgage markets, the fact that the base interest rate has just been held at its record low of 0.5% and may be reduced in due course will support buyers’ ability to purchase. This bodes well for those re-mortgaging or new entrants to the housing market. Lenders may be rigid in passing on lower rates and still be strict on loan to value ratios but the historic low cost of borrowing will continue to underwrite demand and thus support prices.
However, what we are likely to see in London is greater price sensitivity and thus lower capital growth. In May, the Chancellor suggested that property values in the UK could be 10-18% under their expected trend by mid-2018 because of a short term economic shock following our withdrawal from EU membership. London is arguably most at risk due to being the least affordable region in the UK but the very constrained supply, low interest rates and our Capital’s institutional factors will help support prices. The Nationwide House Prices Index recorded London prices had grown 10% in the 12 months to July 2016. Therefore even with a fall in demand, it would need to be significant to stop annualised capital growth.
We have seen certain purchasers seeking to take advantage of the uncertainty by making offers well below asking prices and some vendors have agreed to discounts. However, we have also seen some record and full asking prices achieved which indicates that some purchasers are taking a longer term view over the value of properties they are purchasing.
The Lettings Market
Not unsurprisingly the lettings market has shown greater resilience than the sales market to the uncertainty leading up to the Referendum and continues to do so. On average, we have witnessed an increase in activity for those looking to rent a property. Comparing the ratio of prospective tenants to landlords, there has been some variation over the past six months but in the last three months there have been progressively more tenants seeking rented property across our London network. However this does mask some regional variations where those offices more reliant on European and corporate tenants have not seen such resilience.
Although both sales and rental demand appear to be stable following the vote to leave, Britain has not begun the negotiations of withdrawing from the EU and until the mechanics of re-establishing our trading positions have taken hold we will not know the extent of any adverse consequences. However we now have greater political stability with the rapid succession of our new Prime Minister and the swift appointment of a new Cabinet. The FTSE 350, which is more representative of British commerce, is at a higher level than before the Referendum as is the FTSE 100. The Bank of England is strategically ready to counter any downturn in economic activity through quantitative easing, relaxing commercial lending criteria and reducing the base interest rate. The Treasury may also implement fiscal measures such as reducing corporation tax to encourage more investment. The new Chancellor has already announced that he will aim to ‘scale back austerity’ and has pledged to ‘protect the City’. This improved political and economic position will encourage greater confidence and should help support prices.
Head of London Research Department
Disclaimer: Any figures, commentary and opinion published in this report is for general information only and in no way intended as financial advice and should not be relied upon in any way. Frank Harris & Co., assumes no responsibility for any loss from the use of any material in this report.