The debate regarding the referendum on the UK’s membership of the EU is certainly hotting up and there has been much hyperbole from both the “in” and the “out” camps. However, there has so far been little in the way of detailed impartial analysis of the implications of a decision to leave – the so-called Brexit.
No comparable evidence exists in terms of precedent upon which to base any analysis. Upon gaining independence from Denmark, Greenland voted to leave the EU in 1985 – as did Algeria and St Barthélemy when they seceded from France – however it would be a very different situation for the UK as a founder member and one of Europe’s big four economies.
This effectively means that no-one actually knows for sure what would happen if we were to leave the EU. Nonetheless, we consider below the key issues with regard to the UK’s residential property market and the wider economy and assess possible outcomes.
The impact on the UK property market
Any impact on the UK’s residential property market from a Brexit is likely to be felt in three ways. Firstly, indirectly from the possible negative repercussions on the wider economy, and secondly, directly in the form of how foreign investors might react. Lastly, the impact of the effect on confidence and the uncertainty created by a period of change. This could create a ‘wait and see’ period for many buyers and sellers who are moving out of choice rather than necessity.
However, this is an unlikely scenario unless they absolutely needed to release funds from their property assets or unless the reasons why they bought in UK in the first place change (e.g. safe haven for investment and flight capital, strong long term residential property performance) – both of which appear remote for the time being. The same rationale would apply to foreign buyers considering future acquisitions in that a Brexit at present seems unlikely to reduce the attractiveness of UK’s residential market. Moreover, if sterling were to fall as forecast, then foreign purchasers would benefit from an effective discount which would go some way towards offsetting the recent increases in property taxation.
Foreign buyers are an important component of sales demand, most obviously within the prime locations but also increasingly in non-prime submarkets as investors. Were they to retreat from the market in significant numbers, the effect would be considerable as a rapid mass sell-up would almost certainly cause values to drop.
The impact of a Brexit on the UK and London (in particular) will potentially be more significant given the importance of foreign investors, both in the sales and lettings markets. Foreign capital is behind many of UK’s large residential development projects and any associated uncertainty could act as a drag on future investment, further exacerbating the current supply shortages currently experienced in all but the top end of the new build market.
A significant drop in buyer demand would cause prices to stagnate if not fall. In the event of an economic slowdown, supply will also be affected as reduced demand would likely cause developers to react by cutting back their construction programmes, while Government support for housebuilding would also be negatively affected by enforced budgetary constraints.
Outside London, the market is predominantly driven by domestic demand which is unlikely to be significantly affected in the event of a Brexit unless the wider economy slows and employment, earnings and confidence all suffer. The availability of cheap mortgages has sustained demand in recent years and a potential threat might come in the form of a hike in interest rates in the event of inflationary pressures arising from a fall in sterling and the likelihood of more expensive imports from the EU.
In conclusion, if the referendum delivers a “leave” vote the worst case scenario would be a reduction in foreign buyer demand which would trigger a drop in capital values in prime locations in UK. However, as noted earlier this seems unlikely, and the effect out of the city is likely to be minimal.
A “stay” vote would leave the market in pretty much the same position as at present, with prime values unlikely to see much change for the remainder of the year at least until the market absorbs the various increases in property related taxes. The prime market is unlikely to receive much in the way of a fillip as underlying conditions will be unchanged while the mainstream market should remain strong until mortgage rates rise.
Vendors thus face the hypothetical possibility of values and demand both falling in the prime sector in the event of a “leave” vote. On the other hand if we remain within the EU conditions are unlikely to change much from their present position in the shorter term. In short, market conditions could get worse but are unlikely to improve for a while, so for vendors who are considering selling there is little merit in waiting until 23rd June. The bottom line, however, is that nobody knows for sure what will happen and any sell decision should be weighed up on the basis of probability of risk against the need to sell.