Brexit and the Property Market – Pre Article 50 Analysis

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With a comfortable majority for their bill in the House of Commons, it now looks as if the British Government’s ambition of triggering Article 50 of the Lisbon Treaty by the end of March will be achieved

This implies a two-year negotiation period on the terms of Britain’s exit from the EU – although a trade deal with the bloc will almost certainly take longer. As ever with politics, there is a degree of uncertainty about the outcome: the UK and European Parliaments, French, German and Dutch elections, legal battles in British and European courts, changing public sentiment and the fragile peace in Northern Ireland all have a chance of disrupting Brexit. The best bet, however, is that Britain will leave the EU in 2019, and will leave the European single market as well.

Immediately after Brexit, both the pound sterling and UK stocks fell dramatically. However, the economic situation has since stabilised. What will Brexit mean for the property market? Predictions range from a worst-case scenario 18% drop in house prices to reasonable, though slower, growth. Here are the factors to look out for:

  1. The Pound Sterling:

If Sterling continues to depreciate, UK property will become relatively cheaper and therefore more attractive to foreign investors. Exporters would also get a boost, which may increase commercial capital investment. However, the personal finances of British consumers will take a hit, with negative effects on demand which could cancel these factors out. Insofar as a depreciating pound leads to inflation, this will undermine investor confidence and also lead the Bank of England to consider raising interest rates.

  1. Interest rates:

UK interest rates are currently at historic lows: the only way is up, and the question is how much and when. Mark Carney and the Monetary Policy Committee have a difficult job to do in weighing up whether to protect the pound and limit inflation by raising rates, or protect stocks and employment by keeping them down. Higher interest rates, other things being equal, would reduce demand in the property market.

  1. Passporting rights for the City of London:

‘Financial passporting’ allows banks based in the City to trade and offer services freely across Europe. Although Theresa May seems committed to taking Britain out of the single market, the interests of the City weigh heavily on any British Government, and it is likely that she will seek to protect passporting rights. Continental politicians however, with an eye on bringing more business to their own financial centres (and to punishing Britain for leaving the EU), may refuse this. Some major banks have already put plans in place to move business from London, and if more follow, the London property market, particularly at the high end, is likely to see prices fall.

  1. Net migration:

A major reason for Britain’s departure from the EU was the desire of the public and many politicians to reduce immigration. Most economists believe that immigration is good for the British economy, and it is certainly the case that higher net migration means higher demand for housing. Recent figures show net migration declining, but still positive, and above the Government’s declared target. Brexit need not mean lower net migration. Although the end of free movement for EU citizens will make their coming to the UK more difficult, it will also make it harder for Britons to emigrate to Europe. Moreover, the government may permit high levels of immigration to shore up certain sectors of the British economy, including construction, hospitality, care and agriculture, that have become reliant on migrant labour. Lastly, immigration from outside the EU should be unaffected. What happens to net migration will depend on the strength of the British economy (a weaker economy will be a less attractive destination for would-be migrants) and the beliefs of those in government.

In summary, the impact of the next few years of Brexit negotiations on the property market has the potential to be large, but is uncertain. The risks are significant, but not inevitable. Investors would be well-advised to keep an eye on the political debate as well as economic indicators.

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This article was written by Matthew Dailly, Managing Director of Tiger Bridging.

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