Is Brexit Damaging The UK Property Market?

“The Market is clearly affected by brexit.
The London property prices have dropped by 3% since the ‘Leave’ vote in 2016.
The average UK property price is now £225,995.
Many estate agents are closing down due to low activity in the market; and there is talk amongst practitioners that prices could drop further.
May lead to negative equity for some homeowners. ” Godwin Okri, property expert.

Capitalism does not (and cannot) exist in isolation. It not only co-exists with socio-political events, but is also shaped by them. Nowhere is this more evident than how Brexit is affecting the UK property market. The Real Estate Market has not long come out of the credit crunch deep freeze and is now facing the headwind of Brexit.

The Market is clearly affected by it, for instance, the London property prices have dropped by 3% since the ‘Leave’ vote in 2016. The average UK property price is now £225,995. Many estate agents are closing down due to low activity in the market; and there is talk amongst practitioners that prices could drop further, which may lead to negative equity for some homeowners.

So, how did we get here?

On 23 June 2016, following a Referendum, a small majority (51.9%) voted in favour of leaving the European Union (EU). On 29 March 2017, the UK government invoked Article 50 of the Treaty on EU, paving the way to leave the Bloc. Around July 2018, the British Cabinet agreed to the Chequers Agreement which suggests what the future relationship between the UK and the EU should be. Negotiation began and Michel Barnier (putting the case for the EU) want a clean break. But there is an impasse: should there be a ‘soft’ or ‘hard’ Brexit? What about the Irish border? How much is the divorce bill? These issues are like the unwanted pregnancy in an unhappy relationship. The promise of ‘till death do us part’ is now a distant memory. The drums of war can now be heard and
the battle line is drawn.

And now, how is the market reacting?

There appears to be a broad consensus amongst Economists that Brexit will likely reduce the UK’s real per capita income in the medium to long term. In January 2018, the Brexit Analysis of the Government, which was leaked, showed that UK economic growth would be stunted by 2 – 8% for at least 15 years following secession from the EU; depending on whether it is a “soft” or “hard” Brexit.

There are three things which are unsettling the Market: the likely loss of business as a result of secession; the size of the divorce bill; and the uncertainty of the type of Brexit to be achieved by March 2019 (the date set for secession).

The fear of leaving a big market such as the EU is causing jitters amongst businesses resulting in some companies making plans to move their business away from the UK. Some Japanese companies are already putting the move in motion. Toyota Motor Corp recently said that it might have to temporarily halt output at its Plant in Derby, England, in the event of a “hard” Brexit.

In the summer, Bank of America announced details of its plan to move from London to a new Paris trading floor with room for 1,000 staff. JP Morgan Chase is also considering a move to Paris. HSBC, which already has a big French operation, is moving as many as 1,000 jobs from London to Paris. In fact, Europlace, a lobby group, has forecast that 3,500 finance jobs will be created in the French capital because of Brexit.

The size of the divorce bill also does not help matters. The EU expects the UK to make contributions towards financial commitments that were approved by the EU while the UK was still a member. This is sometimes colloquially referred to as reste a liquider, the French accounting term to describe money that has been committed to a project but not yet spent. According to EU auditors, the spending promises are in the region of E267Bn in 2017. Although the British Government believe its share of the Brexit bill is in the region of £39bn. This is the amount the taxpayers have to shoulder, which may result in increase in taxes.

The uncertainty of the sort of Brexit we end up with in March 2019 is also another problem. Mark Carney, the Governor of the Bank of England, has warned that a no-deal Brexit will harm the UK Economy and that unemployment, consumer price and interest rates could rise. Ross McEwan, the chief executive of the Royal Bank of Scotland PLC, has also said that a no-deal Brexit could lead to recession.

Where does this leave the UK Property Market?

The Brexit issue is like the unwanted mother-in-law who takes over the matrimonial home. Brexit is influencing the housing market presently. House prices have dipped month on month for the second time in a row as buyers adopt a “wait and see” approach. According to Halifax, property values across the UK fell by 1.4% in September 2018, following a 0.2% slide in August. Annual house price growth also slowed, to 2.5%, following a 3.7% increase in August. This is the reason the average house price in the UK now stands at £225,995 as at September 2018.

In a recent Cabinet meeting, Mark Carney spelt out the potential consequences of a no-deal Brexit. He warned Ministers of a 35% crash in house prices over three years.

A housing market crash would benefit no-one (not even First-Time Buyers). This is why no one like to see the value of their home fall; particularly if it puts them into negative equity. So the consequence of a price fall is that it affects consumer confidence and spending.

Keynesian economists see a fall in spending as a danger to the overall economy because it could contract the economy, driving up unemployment and cause a recession. In a contracting economy, lenders would be reluctant to lend thereby making mortgages difficult to obtain.

In a nutshell, it is inevitable that the UK would leave the EU. What is not clear is the magnitude of the impact it could have on the UK Economy. Clearly, the breeze of Brexit is blowing causing the Property Market to sway. If the ‘breeze’ becomes a tornado, the fate of the Market will most likely be sealed. So if music be the fruit of love, play on! But if a no-deal be the fruit of stupidity, please stop…