For Nigerians and other nationals, owning a property in the United Kingdom (U.K.) is a viable investment because of its huge returns. But less than a month after the country signed up to exit the European Union (EU), otherwise known as ‘BREXIT’, investing in U.K. properties may no longer be that attractive as experts have predicted a 30 per cent drop in value, writes MUYIWA LUCAS.
London property prices could fall by more than 30 per cent in the wake of Britain’s vote to leave the EU and may halve in the most expensive parts of the city, according to analysts at the French bank, Société Générale.
Brexit may be the trigger to end London’s seven-year house-price boom as companies move employees out of the U.K., forcing sales of high-end properties, the company’s real estate analyst Marc Mozzi said in a note to clients.
Commercial property has been at the centre of post-Brexit fears as investors have tried to get their money out of property funds, but residential real estate could be hit harder, Société Générale said.
“While in recent stress tests the major UK banks were assessed with declines of about 30 per cent in commercial real estate prices, we fear that London residential could experience an even more severe downturn,” it said.
Sean Farrell of UK’s The Guardian writes that prices are already falling on properties previously valued at £1m or more, and may have further to go, particularly in the priciest parts of the city, such as Hammersmith and Fulham as well as Kensington and Westminster, as well as other high priced boroughs where London’s highly paid investment bankers and hedge fund managers congregate.
Société Générale added: “We see a classic housing bubble in London and Brexit as the trigger for the correction. Given the current ratio of prices to incomes in London, a price correction of even 40-50 per cent in the most expensive London boroughs does not seem impossible.” This prediction is premised on the fact that London property prices have more than doubled since they began to recover from the financial crisis in 2009. Last month, the average London house price was £472,000 – 12 times average London earnings, compared with a long-term average of six times, Société Générale said.
Brexit could push those stretched conditions to breaking point by forcing about 3,000 senior employees of financial firms to sell their London houses to relocate to Europe, Mozzi said. That would be more than a year of transactions in the market for homes costing £2million or more, leading to big potential declines in prices.
Many non-UK banks and other financial companies base their European operations in Britain because EU membership allows them full access to the single market. That “passporting” arrangement may end when the U.K. leaves the EU, forcing companies to relocate businesses to Europe.
Mozzi cited a report by a reputable accounting firm, Pricewaterhouse and Coopers (PwC), before the referendum that said Brexit could result in between 70,000 and 100,000 people employed in the financial sector. The report, published in April, compared likely post-Brexit numbers in 2020 with a forecast for jobs if the UK stayed in the EU.
Another firm of estate agents, Savills, presented a less gloomy picture though. It said London sellers were already adjusting prices, while interest rates are expected to stay low and the pound’s fall could attract overseas investors to buy property.
“The vote in favour of Brexit suggests that political and economic uncertainty is likely to remain a feature of the market for some time to come. Of course it is not all negative news. We expect the newly formed UK government to be highly motivated to protect London’s position as a major global financial centre in any negotiations with the EU,” Savills said.
Mozzi said the pound’s fall was unlikely to have a lasting positive effect on investors, who will hold off if they fear further falls in the value of sterling will reduce the value of purchases.
What’s next for the housing market?
According to Susan Emmett of The Spectator, UKm since buying a house is a major decision, few people will want to commit to such a life changing purchase in times of uncertainty. Therefore, she noted, it is no surprise that the confusion, fear and downright shock that followed the EU referendum vote to leave has had an effect on sentiment in the housing market.
Figures from the latest survey from the Royal Institution of Chartered Surveyors have confirmed what is been all already suspected – that Brexit uncertainty has had an impact on market activity. From the survey, new buyer enquiries declined significantly across the UK in June to its lowest reading since the mid-2008. The survey also recorded further decline in sales and many expect this to continue. Last month also saw a reduction in house price growth. While values are still rising at a national level, they are doing so at a more moderate pace.
However, the extent to which this is a consumer reaction, than to political upheaval or a sign of things to come in the housing market is still unclear. Appetite for clarity of the direction of the housing market is only matched by the dearth of data that would allow stakeholders to properly assess the situation. Emmett said it will be autumn before all the numbers are in and even then, there will be great potential to misread the runes.
Tough decision
Emmett observed that for every homeowner worried about the potential erosion in the value of their asset, there is also a prospective first-time buyer rubbing their hands and hoping for the kind of price drop that would really help them get on the ladder. But she explained that none of this is any help for someone in the middle of buying a home for the first-time or trading up. Should you just get on with it or wait? And if you do wait, how long for and will it be worth it?
Over the coming weeks and months, stakeholders in the housing sector expect buyer caution to continue and consumer sentiment to fluctuate as negotiations to leave the EU proceed. This will have an impact in the number of sales, with fewer deals done. As a result, transaction numbers are likely to fall from the annual high of 1.3 million recently recorded. The extent of that decline will depend on other factors- how mortgage lenders react, the strength of the economy and how that affects consumer spending power.
Shape of things to come
But at this point, analysts say it’s business as usual as far as mortgages go. The base rate is at 0.5 per cent this month but the cost of borrowing is likely to stay lower for longer. The Bank of England is at great pains to ensure the lending cogs continue to turn. It has already eased capital requirements for banks, potentially freeing up £150 billion of capital. Lenders’ choice of customers, however, will be the thing to watch. Should banks perceive a risk, they will be less likely to lend to borrowers with small deposits who require loans at large multiples of their income. That might raise the stakes for first-time buyers and particularly impact on London where affordability is already quite stretched.
Further down the line, economic factors will determine the health of the property market. Household finances could come under pressure from a spike in inflation triggered by a weak pound. The prospect of slower economic growth is likely to constrain income growth, reducing spending power further still. All this is likely to affect house price growth. Already, the pace of activities in the sector has slackened and this could continue.
Emmett submits that at this stage however, there may not be many forced property sellers. In fact, one of the key features of the market at the moment is a lack of property for sale. She however didn’t rule out price falls in some markets where affordability is really stretched, leading to house prices being underpinned by low interest rates and low supply.
