In a bid to sway voters, George Osborne is predicting Armageddon in every economic sector as the collateral damage of Brexit. This week he pointed the finger at property prices, predicting a significant dampening if the UK votes to leave.
The chancellor is correct that the property market does stall in the face of investor uncertainty, clearly demonstrated in general election years. On average, this translates into a 15 per cent reduction in transactions in Prime Central London (PCL).
The 2015 general election saw sales volumes fall 18 per cent, but all the evidence suggests that markets rally thereafter, regardless of the outcome. In 2005, the last time Labour were elected into power, transactions fell a staggering 31 per cent in the lead up to the election but bounced back 26 per cent after the result. In 2015, despite the significant tax headwinds impacting the market, the pre-election fall was counteracted by an 8 per cent increase in sales shortly afterwards.
A delay in reporting time for property sales means that little information is currently available as to any hold-back around EU referendum jitters. In fact, recent figures from the Council of Mortgage Lenders show gross mortgage lending in the first quarter up 60 per cent over a year ago. This, however, is distorted by buyers beating the new Stamp Duty charges for additional properties which came into effect in April. The anomaly is likely to magnify any fall away in transactions pre-referendum.
Although a hold-back, akin to a general election, is anticipated and anecdotally palpable as the referendum debate heats up, the upshot is that now is an excellent time for investors to buy. A slightly softer market, as Brexit uncertainty is compounded by the current tax headwinds, offers plenty of opportunity, particularly in PCL’s sub-£1m sector. Relatively unscathed by new legislation, it continues to show robust growth.
Despite the prospect of fewer buyers, a slowdown in sales is not expected to have a marked knock-on effect on prices. With little dependency on mortgages, PCL investors are unlikely to be forced to sell due to economic uncertainty. During the global credit squeeze, for instance, transactions fell a staggering 70 per cent as the crisis ensued but prices fell just 14 per cent as investors preferred to hold onto their assets and await economic clarity. Prices bounced back to par in 2010, just one year later.
How would the different referendum outcomes affect the market? In the event of a remain vote, a return to the status quo and a hardening of prices is expected. But a return of investors is not always immediate, particularly in the face of the current tax environment. As with the 12 month lag during the credit crunch, a bounce-back following a stay vote is not anticipated until next year.
A global capital, directly affected by international, not domestic, concerns, PCL is probably most exposed to any future Brexit impacts if Britain votes to leave.
But Europe has only played a limited role in attracting international capital to the London property market, representing only 12 per cent of buyers in PCL, according to our analysis. An unlikely total withdrawal will have little net effect on property prices.
On the other hand, further currency devaluation will increase London’s attractiveness to international investors worldwide. Brexit uncertainty has already driven sterling to lows not seen since the global credit squeeze. Dollar-denominated investors are enjoying discounts of almost a fifth. Further depreciation, as a result of an exit, will only augment PCL’s global attractiveness. While property nationwide will not benefit from this currency move, it should create a tailwind for foreign buyers coming into PCL property.
Worldwide, investors are attracted by London’s reputation as a cultural, educational and financial centre, together with its rule of law, and political and economic stability – all factors unaffected by a UK exit. From a property perspective, people will continue to be drawn to this, whether or not the UK is a smaller power outside the EU bloc.