Chamberlain Walker

Brexit and the London Housing Market: Another Look

There have been a fair number of doom-laden headlines about London’s housing market following the Brexit vote (on 23 June 2016).

“Brexit uncertainty sends London house prices tumbling”

“Brexit could cut London house prices by more than 30 per cent, says bank”

“Brexit is officially starting to destroy property prices – especially in London”

Some experts are predicting a house price correction in London of 20 per cent or more, with less pronounced falls or stagnation in the rest of the country. In one of the starkest warnings, Investment Bank Societe Generale told clients that house prices could fall 40–50 per cent in some of the most expensive parts of London.

So what do we know about what is happening in the capital’s housing market? And is it really looking as bad as all that?

By way of context, it is worth seeing what we can glean from data in the period just before the referendum. Firstly, the latest Office for National Statistics (ONS) house price figures (published 19 July 2016) painted a relatively healthy if not buoyant housing market picture, with London house prices up 13.6 per cent on the previous year (England ‘only’ 8.1 per cent). The ONS data are of course behind the curve, being based as they are on purchase completions, and only cover activity up to the end of May (before the apparent surge in support for Leave detected by opinion polls in the first weeks of June).

But there were also clear signs of a slowdown in the London housing market nearer to the vote, which some commentators have attributed to the 3 per cent Stamp Duty surcharge on Buy-to-Let properties that took effect from April this year. The latest Royal Institute of Chartered Surveyors (RICS) housing market survey covering June (so mostly before the vote) reported that London was already seeing declines in prices with a net balance of 46 per cent of its surveyors seeing values being reduced, mostly in central areas and in a trend that started some months ago.

More insightful, the RICS also suggested a marked fall in the number of housing market transactions. The demand and supply dynamic in London is certainly worth noting: demand fell in June – again mostly before the referendum – with a net balance of 58 per cent of surveyors reporting a fall in buyer enquiries in London (36 per cent in England). However, so did supply, with a net balance of 55 per cent of surveyors reporting a fall in seller instructions in London (45 per cent in England). So a general shortage of properties on the market compared to demand was continuing to support prices, though less so in London.

There were also some signs of a housing market slowdown in housebuilding: Molior London reported a 34% fall of off-plan new builds to a 3-year low in the April to June period.

So the general picture in the lead-up to the referendum was one of cooling housing market activity, though with prices remaining relatively firm. But what about since the Vote?

The Nationwide reported at the end of July that house prices rose by 0.5 per cent in July on June, and 5.2 per cent on a year earlier. They commented that the impact of Brexit on house prices was not certain. In slight contrast, Rightmove’s latest asking prices data, which cover a couple of weeks beyond the vote, show asking prices have fallen in the wake of the Brexit vote and in every English region, though interestingly the worst falls were not in London. Rightmove appears relatively sanguine about this, noting that a fall in asking prices is not particularly unusual for this time of year. Asking prices in London were down 1.2 per cent for the period 12 June to 9 July and down 0.9 per cent in England, compared to the previous 4 weeks. The 0.9 per cent fall, in turn, compares to an average 0.4 per cent fall at this time of year over the last 6 years. So sellers do typically price more conservatively heading into the Summer holiday period.

Other post-Brexit data include the LonRes survey, which shows buyer completions fell by 18 per cent from before the ballot and were down 43 per cent on the same period last year – i.e. not seasonal. This reinforces the narrative conveyed by the (mostly) pre-referendum RICS survey data of a fall in housing market activity.

So, to the degree there has been a housing market shock from Brexit, the market appears so far to be responding through market activity: with transactions and not prices bearing the brunt. If that sounds familiar then it should – it is precisely what happened to the housing market in the aftermath of the Great Financial Crash.

A fall in housing transactions rather than house prices would certainly make sense: the worst house price falls should happen in a market where there is ‘forced’ selling – i.e. owners are unable to hold out either as a result of higher mortgage interest rates (people having overstretched themselves in terms of their indebtedness) or rising unemployment which mean people can no longer service their mortgage repayments. In short, people will not sell unless they have to; many would rather delay a house move or become ‘involuntary landlords’ than sell when house prices are falling. In the economic jargon, house prices display the characteristic of being ‘downwards sticky’.

Such forced selling appears unlikely given record low mortgage interest rates. The Bank of England today cut the base rate further, to 0.25 per cent from 0.5 per cent, a new record low. There is a question however of how much further the Bank of England can go, with the foot already close to the floor in terms of monetary easing. A bigger question is whether the real economy and employment can hold up and here too the news is mixed: for example, last week’s very strong UK GDP figures in the 2nd quarter to June versus sentiment surveys such as the GFK consumer survey and Markit Purchasing Managers’ Index (PMI) conveying storm clouds ahead.

There is further reason to be cautious. The worst house price falls can also happen speculatively. Arguably the headlines surrounding commercial property immediately post-Brexit were the most doom-laden as open ended funds temporarily shut the door on clients wishing to take out their investment, a distinct whiff of fear and panic selling. The London housing market is international, driven by global capital flows – with investment funds and wealthy foreign investors buying London property as an investment. A reversal of these international investment flows could arguably tip London’s housing market the other way. As a counterweight, the Pound’s fall is showing early signs of attracting new overseas investors in (current investors have already taken the hit, arguably they may as well batten down the hatches).

But despite the Brexit Vote and beneath all the noise and doom-laden headlines, we would do well to remember there is still a chronic shortage of housing in London. We are still only building half the homes we need to build each year in London to keep pace with its growing population. That’s not to say some ‘correction’ is not needed (whether the London market is ‘overvalued’ is a question for another day) but talk of “20 per cent plus” post-Brexit seems overdone in view of the fundamentals and with transactions seeming to act as shock absorber. It is certainly far too early to call the London housing market post-Brexit; we shouldn’t be hitting the panic button just yet.