Is Brexit to blame for the UK’s beleaguered property market?

The B word bears the blame for a lot these days. Political tensions and souring investor sentiment have hit the UK property market hard, but is every difficult-to-sell property or lowered asking price the fault of Brexit?

While RICS blame Brexit uncertainty[1] for the troubles, I see this as an oversimplification of a problem that has much deeper roots. Brexit is certainly playing its part, but it is not the only factor influencing the market.

Nicholas Barnes, Head of Research at Chesterton’s, is quick to point out that he sees no correlation between the Brexit vote and property market woes away from the capital.

“Outside of London, Brexit means very little to people,” he says. “Brexit hasn’t caused as much impact elsewhere, and why would it? If we leave tomorrow with no deal, most people will still have job security and interest rates are unlikely to rocket.”

Gavriel Merkado, founder and CEO of big data aggregator REalyse, agrees, “What we have now is an isolated (UK only) case of uncertainty reducing property transactions and prices in highly ‘international’ areas, predominantly London and the South East.”

So, if Brexit isn’t the primary cause of the market’s current lacklustre performance, what is?

Affordability

The numbers aren’t adding up any more for buyers according to David Jacobs, co-founder of online property agent Yopa. He says, “over the last decade, the rise in property prices have outstripped the rise in wages, particularly in London.

“Couple this with stricter mortgage lending criteria, and it is increasingly difficult for first time buyers to get on the property ladder without the Bank of Mum and Dad."

Nicholas Barnes agrees that affordability is a key issue. “The buyer-occupier market is shrinking in London, and we’re becoming a nation of renters,” he says.

This is because people are struggling to get on the property ladder – real income growth has only been positive in the last year.”

Government Intervention

Government policies aimed at increasing stock for owner-occupiers are arguably one of the main culprits of the current market slowdown. A 3% increase in Stamp Duty introduced in April 2016 for second home owners was designed to increase availability by discouraging buy-to-let (BTL) landlords. It resulted in negative price growth nationally[2].

Gavriel Merkado says that the policy has produced mixed results. “We’ve seen prices level out in central London after a period of decline following the problems of Stamp Duty and Brexit. Outside of London, prices continue to rise and yields resultantly fall as rents fail to keep up.”

As well as falling yields and changes to Stamp Duty, stricter regulations imposed on buy-to-let mortgage lenders and changes to how letting income is taxed have also played their part in discouraging private landlords. What we’re seeing now is the retreat of a group that has historically been one of the main purchasing forces in the market. Whatever shape Brexit takes, that isn’t going to change.

Government policies aimed at increasing stock for owner-occupiers are arguably one of the main culprits of the current market slowdown.

New-Build vs. Secondary Market

Squeezed out buy-to-let landlords might be fewer and far between, but Help-to-Buy has bolstered the new-build market. Since 2013, the government’s equity loan scheme has helped to fund almost half a million property transactions[3].

Great news, but we’re far from the home stretch yet. One of the main drivers behind increasing regulatory burdens on private landlords was to free up stock for those struggling to get on the property ladder. With Help-to-Buy boosting the popularity of new-builds among that cohort, the secondary market is at risk of decreased demand from both landlords and first-time buyers.

New home supply is another tricky point. The UK is currently in the grips of a national housing shortage, and we’re still a way off the Government’s target to build 300,000 new homes a year. Savills estimates that only 218,000 new homes were delivered in 2017/18[4]. The majority of those (around 60%) are being built by just 10 housebuilders[5], it’s clearly in their interest to ensure demand outstrips supply.

Long-Term Outlook

The one upside to a market downturn is that necessity drives innovation. As Gavriel Merkado points out, “The market will always innovate to solve the problems of the day in the best way it can.”

Innovation and diversification are sentiments echoed by Yopa’s David Jacobs, “It is essential for home buyers to look at new ways onto the ladder.” He predicts that shared ownership and Help-to-Buy ISAs could make home ownership accessible to more people and help to boost the market.

Cogress’ Head of Research, Daniel Levene, believes the government need to readjust their stance to create meaningful, positive change in the property market. He says recent changes made to the Permitted Development Rights, the Help-to-Buy scheme, and minimum requirements on shared ownership have had differing impacts.

“Currently, innovations are not targeted to the needs of the market, so they’re not permeating the market in the right places. We need brave thinking from Government to make a difference, not more of the same.”

The market is certainly evolving, and I don’t think we’ll see it return to 2014 highs soon. While Brexit hasn’t helped, it isn’t to blame for the market slowdown and the issues we’re navigating now are largely the result of tax and regulatory changes.

The factors that have the biggest and most detrimental impact on the market – interest rates, wage growth and job security – are unlikely to be hit by Brexit (interest rates still have a way to go before they’ll impact the market). Most critically, the property market is need-driven, and we’re currently in the grips of a national housing shortage.

 

References

[1] Royal Institute of Chartered Surveyors. 2019. Brexit uncertainty considered the overriding obstacle of the market. February 2019: UK residential market survey. RICS.

[2] Hometrack Data, 2019. Index YoY Price Growth 2014-2016.

[3] Faith, J. 2019. Half a million homes bought with Help to Buy schemes. Your Money.

[4] Greenwood, L. and Henderson, M., 2018. How do we reach 300,000 new homes? And who will build them? Savills.

[5] House of Lords, 2018. 11 January 2018, volume 788. Hansard.

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