The EU Referendum & The Property Market: What We (Don’t) Know
It seems that everywhere you turn at the moment, someone is talking about the EU referendum. Feelings are running high on both sides, and yet it feels like there’s very little in the way of straight-up, unspun facts.
We’ve set out on a quest to try and pin down some objective answers. After all, there’s an awful lot of discussion of how a potential exit from Europe will affect the property market. So, we thought it only right that we should try and clear things up for you guys.
However, with our crystal ball sadly out of order, we’re sorry to say that we’re none the wiser. Turns out, no one really knows for sure what will happen if we leave Europe, nor even how things are likely to go if we stay. That’s not to say a little guesswork couldn’t be beneficial… Frazer has offered a ‘Referendum Martini’ to the person with the most accurate prediction when we review the impact of the referendum in twelve months’ time.
So, how do you like yours? Shaken, not stirred? On the rocks? We’re afraid straight-up seems to be off the menu right now.
A poll back in November by Greenberg Quinlan Rosner identified Founder of MoneySavingExpert, Martin Lewis, as the most trusted voice in the EU debate. So, let’s see what he has to say.
Gee, thanks for that, Martin.
Martin also added that “anybody who tells you that they know what will happen if we leave is a liar”. Of course, he’s right. No one really knows what’ll happen if we leave. Either that, or it’s being kept very, very quiet because there are dragons involved.
Dragons or no dragons, one thing’s for certain: on 23rd June, we’re expected to queue up at the polling station to cast our vote in the national equivalent of a “Guess how much this pig weighs” competition at the village fair.
Whatever your own, personal views may be, we’re sitting firmly on the fence with this one. Frazer himself sighed heavily when we announced our intention to write this article. Nonetheless, we still want to give you, our investors, a bit of a rundown on how the referendum may or may not affect the property market here in the UK. We’re basing this purely on the information that’s out there already (trust us when we say that, whilst writing this, we have three browser windows open, with a total of eighteen tabs between them, plus a notebook full of confusing stats and quotes), so just to drill the point home: we have no interest in swaying your vote either way.
With that in mind, probably the best way of doing this is to tackle each side of the debate in turn. Are you sitting comfortably?
Bremain: The ‘Stay’ Camp
The Prime Minister and Chancellor are, as we all know, rooting for Remain, marking an elaborate about-turn on what Cameron had to say about the EU back in 2009, before he was elected Prime Minister. This may, or may not, have something to do with TTIP, another thing that may, or may not, be good for Britain. But, of course, there’s plenty of talk of deception from both camps, with even Bremainers suspicious about Cameron’s motives for switching sides.
Whatever the motives, George Osborne has come out with a damning indictment of what he reckons will happen to the property market in the event of a Brexit. The Chancellor predicts a house price crash, which would leave homeowners in negative equity and being forced to sell at a loss, and property investors seeing a slump in the value of their asset. He has also stated that the cost of mortgage products would rise, so even those seeing the opportunity in a crash to get on the property ladder would not benefit. Even with lower housing prices, if mortgage prices go up, people wouldn’t necessarily be able to afford to buy anyway. He predicts that, within the fifteen years following a Brexit, households would be £4,300 worse off.
Whilst the general consensus is that Brexit could cause a drop in property prices, Robert Gardner, chief economist at Nationwide, believes that other factors could keep those prices buoyant:
“It is possible that the recent pattern of strong employment growth, rising real earnings, low borrowing costs and constrained supply will tilt the demand/supply balance in favour of sellers and exert upward pressure on price growth.”
This view, of course, supposes that those factors will remain constant in the event of a Brexit, which – again – is not entirely certain. Perhaps we should ask Martin Lewis again…
Brexit Clauses and The Fate of Sterling
It’s interesting to note that the most recent reports that support for Remain has dropped appears to have caused an immediate plunge in the value of sterling against the dollar. Could it be that the very idea of us leaving the EU is having a negative effect on our economy?
A survey by accountancy firm KPMG has found that 66% of real estate experts believe that “Britain leaving the EU would have a negative impact on inbound cross-border investment”, with fewer overseas investors being prepared to invest whilst the fate of sterling is so shaky.
Reuters conducted a survey of 24 law firms, and found that a solid half of these had used special ‘Brexit’ clauses, had at least one request for such a clause, or brokered a deal with one. The rest said they’d seen one, though not dealt with one directly.
So, what is a so-called ‘Brexit’ clause? Well, they’re currently all the rage, it seems, particularly in high value investments and with overseas investments, who are concerned that an ‘Out’ vote could weaken the sterling. Such a clause is being added to contracts, giving buyers the right to walk away from real estate deals in the event of a ‘Brexit’ vote.
Paul Firth, of law firm Irwin Mitchell LLP, has stated that “Investors fear that the value and return on investment properties may decline, and may not be as good an investment if Britain withdraws from the EU”.
Buyers investing in the swanky new Two Fifty One luxury apartment tower in up-and-coming Elephant and Castle are doing so on the understanding that they do not have to exchange until July 6th, and could withdraw their offer with a full refund of their deposit if they are unhappy with the outcome of the referendum.
However, whilst such a clause does sound particularly damning in terms of general opinion of Brexit, admittedly it’s mostly just good marketing, a way to try and unfreeze a sector that’s currently being stalled by uncertainty ahead of the vote. Both buyers and sellers are waiting to see the outcome, which can be seen in the commercial property sector in particular, where transactions have fallen a steep 40% in the first quarter of 2016.
Brexit: The ‘Leave’ Camp
Let’s start with George Osborne. This ‘households worse off by £4,300’ figure of Osborne’s has attracted some scrutiny. Sceptics point out that with this statement Osborne is conflating GDP with household income, a phrase that has never been used in any budget to date. In fact, Osborne said himself, when entering office, that “GDP per capita is a much better indicator”. He even went as far as to say that GDP is a misleading indicator that can be artificially inflated by immigration. Interestingly, he’s made no mention of GDP per capita at all upon the launch of the latest ‘Brexit’ documents published by the Treasury.
Going back to Osborne’s statement about Brexit’s effect on lowering house prices, there is a similar potential disadvantage to remaining in the EU with regard to the same. It could be that staying in the EU makes it even harder to get on the property ladder than those proposed hikes in mortgage prices. If there is a surge in immigration to the UK following a Bremain vote, domestic demand may keep house prices rising.
And speaking of immigration, yes, with a ‘Brexit’ vote, there is the chance of EU nationals losing their right to live and work in the UK. However, this assumes that a post-Brexit UK government would immediately seek to cleanse the country of EU citizens. It’s something a lot of Bremainers are very worried about happening, and understandably so. Are you worried about this, Martin Lewis?
But it’s worth asking why the government would do such a thing? It’s most likely that EU nationals earning over a certain amount, and contributing to the UK’s economy, will find it no harder to live here than they do at present. Those who would have to worry are likely to be EU citizens in the UK in low-paid jobs, or who are unemployed. And, speaking purely on the subject of the property industry, it’s not these guys who are going to be buying here anyway.
Let’s look at the prime housing market in London, where, according to a study by Knight Frank, in 2013, for example, 49% of all prime central London buyers were non-British citizens, while 28% didn’t even live in the UK. It’s hard to say if the EU played any role whatsoever in attracting the super-wealthy to London, perhaps not a big one, seeing as only 16.5% of these buyers were from other EU countries.
Some owners in this category would, indeed, sell up and leave the country in the event of a Brexit vote, most likely as a result of institutions like the European Bank for Reconstruction and Development upping sticks and taking staff with them. But the main body won’t be forced to leave, nor, indeed, even want to if we leave the EU. And, what’s more, the bulk of serious money in this area comes from the 9% made up of Russians, and 7.5% of wealthy Middle Easterns, to whom the EU matters not a jot.
That being said, it’s not just the super-wealthy from overseas who favour the UK. Whilst these overseas investors may be attracted to our rising property prices, they also love the UK’s greatest cities for their vibrant culture, relative political and economic stability, relatively honest legal system, and its favourable rules for non-doms. In short, in London at least, the effect of Brexit is unlikely to be too catastrophic. Winkworth’s Dominic Agace concurs:
“The UK and London in particular has always had a draw for foreign investment, not only from Europe, but much further afield, and I would expect this to continue whatever the outcome, especially as people come for many reasons, including schools and the lifestyle.”
Further to all this hoo-hah about property prices plummeting, the Brexit camp would point out that, despite the slowdown in the wider economy, house prices in the UK are still climbing fast. In the year to March 2016, a 9% rise was reported by the Office for National Statistics. Projections also show that prices will continue to rise, roughly by a further 10% by the end of 2018 (according to the Office for Budget Responsibility itself!). So, if we use the Treasury’s own figures, that prices will be 10% lower than they would otherwise be by 2018, surely that implies prices would just be flat on today’s cash terms?
Finally, despite Osborne’s fears that not only house prices would plummet, but that mortgage rates would rise, the Brexit camp is optimistic. Due to immigration from the continent in the event of a Bremain vote, the young people who are currently finding it hard to get on the property ladder would find it even harder, they argue.
To conclude, despite what sounds like good arguments on both sides of the debate, there remain no tangible facts to go on with. Pick your side, and hope for the best. And stay tuned for any news as to who’s going to get their hands on that ‘Referendum Martini’ from Frazer…
Who do you think will win that Martini, Martin Lewis?