What does Brexit mean for UK house prices?

POST BREXIT HOUSE PRICES: London house prices up 5% BUT other UK cities DOWN 3%!

Brexit’s effect on house prices is a hot topic right now. Especially since Theresa May’s hint of a ‘Hard Brexit’ sent the pound tumbling even further in October.

So what does this mean for the value of property in the UK?

Today we are going to look at the main Brexit effect on house prices to give you a better understanding about how this might affect you! By the end of the article you will know everything you need to decide what steps you can take to protect yourself from any drop in prices.

But First, A Quick Intro…

Now that the dust is starting to settle over the historic decision for the United Kingdom to leave the E.U., we property and economic geeks thought we would take some time to look at the possible positive and negative affects of Brexit on UK house prices.

As economists focused on the UK property market, we found this very interesting. And we are not the only ones – we also noticed a sudden spike in online enquiries from sellers looking to value their homes on our website within hours of the announcement.

Weaker pound affects on UK property investment from overseas

The first thing we can look at is the effect of currency on supply and demand from foreign investors. The huge sudden drop in the (£) pound against other word currencies has had an affect:

• On average the pound has dropped 12% and is currently trading in a range where £1 is equal to $1.31 on average
• The reason the current exchange rate is fascinating to people involved with foreign property investment into the UK, is because for almost 10 years it has traded between a range of $1.50 – $1.60 ($1.55 average)
• That means for a Chinese investor a new build flat in London, the price has dropped from $775,000 to $655,000 – giving an instant discount of $120,000 in local currency*
• This has been proven in recent months with Chinese online property portal Juwai.com releasing data showing a 30%-40% increase in UK property enquires compared to historic data

Now that you understand the effective discount the drop in the £ has given overseas buyers, it is easy to see how property investors, including expats, are buying properties quickly in the UK whilst this discount is still available. But one question that remains unanswered is how long this perceived ‘discount’ will last. For anyone who was already considering a purchase in the UK, now is a great time to buy a property.

However foreign exchange rates are not as simple as many think, and there is nothing to say the pound will not drop further, or that it may ever regain the position it once held. With this uncertainty, what is the future incentive to buy UK property?

Property prices in London post Brexit

We could argue that London is its own little country sat within the UK. There is certainly evidence to show this in house prices over the last 7 years. Let’s look at the facts:

• In London NW1, the average houses price in May 2009 was £666,193
• In May 2016 the average sold house price was £1,164,658 – a 75% increase in only 7 years!

By comparison:

• In Swansea SA4, the average house price in May 2009 was £139,05
• In May 2016, this had decreased by 2% to £136,817

So this proves that the London property market is a whole entity on it’s own. If you’re in the London market then Brexit should increase the rate of house price inflation, because demand is only set to outstrip supply further, and with no real increases in the supply of London stock then the price should continue to sky rocket.

However, there is a strong word of caution in our bullish London house price view. This continued positive affect is highly reliant on the UK negotiating terms with the EU, which continue to see London as the financial capital of Europe. Financial services account for around 15% of UK tax receipts, with the majority of it being generated within London. Financial firms moving out of London to Europe mean less jobs in the capital, resulting in lower demand for housing.

It will be interesting to see what happens and the impacts.

Post Brexit House Prices (excluding London)

So as we illustrated above, house prices throughout the UK (excluding London) have remained fairly flat over the last 7 years. There are a number of factors affecting this, and it is the main reason why interest rates are still at an all-time low.

Interest rates act as a kind of counter weight to inflation.

If house prices start to sky rocket out of control (arguably what happened from 2000 – 2007), then the Bank Of England will increase rates to make borrowing money more expensive and thus reduce the number of people borrowing to buy a home.

This would result in lower demand, and therefore prices of housing stock remain stable. It also works the same in reverse – so when we had our crash of 2008, and house prices went through the floor, the Bank of England reduced interest rates to almost 0%. This has worked well for some, as house prices have stablised and money supply has increased to make it cheaper for first time buyers to get on the ladder.

What does a weak pound mean for the cost of new homes in the UK?

OK, so we briefly talked about how interest rates can increase or decrease house valuations by manipulating the money supply in the UK.

Whilst we now know the positive effect of foreign investors buying in the UK, we should also consider what this means for UK residents – or more importantly, UK house builders.

Typically, 30-35% of a property’s value is made up from building costs such as labour, bricks, timber, appliances, etc. When you look at where the core building materials come from, you learn a lot about Polish plumbers, Spanish bricks and Chinese timber – all imported into the UK every year for new builds.

This means these items become more expensive, which also means house prices are likely to increase, to absorb these extra costs.

So what does all this mean for the future?

Overall our view is that Brexit will cause a mid-term positive effect on house prices, but there are some negative headwind risks in the short and long term.

Short term, we are likely to see direct foreign business investment (new factories, etc) reduce until more is known about the impact Brexit might have on their access to the European market (think of Toyota car manufacturing for example, who make cars in the UK and ship across the E.U.). These investments tend to be outside of London, in the North and South East, where there is a potentially negative short term effect of house prices going down, whilst people fear a loss of jobs in the area.

Longer term, if the currency does not return to ‘normal’ levels it is likely that we will see house prices rise as a direct result of inflation in the cost of building housing. Whilst this means increase in house prices it is a zero sum game, because we would see inflation rise across everything meaning the extra value buys us less.

However, this is all theory. The currency may return to normal, and even exceed it’s previous rates. Time will tell. We will keep monitoring the economy, trends, and house prices and bring you our views as things progress.

Questions, thoughts, comments? Please share them with us.

*The Chinese Renminbi (CNY) is generally pegged within range to the USD so for illustration purposes it is common to quote USD figures instead of CNY.