General Election: the Consequences
Whatever your political affiliations, one thing that can usually be said about a General Election result is that it brings with it a measure of certainty. Traditionally, markets tend to slow their pace in the run-up to an election as investors play wait-and-see. Once the decision is announced, postponed deals get put back on the table and business begins again.
This time, however, things are different. Theresa May’s gambit in calling a snap election has backfired; instead of cementing her authority in readiness for the forthcoming Brexit negotiations, her party has been left with fewer seats and the loss of its majority. The Conservatives remain the party with the largest representation in Westminster but now the talk is of minority governments, ‘progressive alliances’ and inter-party backing on a vote-by-vote basis.
Facing the unexpected prospect of a hung parliament, the markets have failed to find the certainty for which they would have been hoping. Consequently, it seems likely that some decisions will be put into abeyance until a clearer picture emerges.
A sense of perspective:
In the grander scheme, however, this delay need not be long. Today, so soon after the election result announcement, the general sense is of chaos and volatility but it’s important to remember that the last hung parliament took just five days to resolve. For serious investors, such timescales are so trivial as to be meaningless.
It’s true, of course, that there are still many important unknowns: whether Mrs May will retain her premiership; whether the next coalition or alliance will be shaded red or blue. Perhaps most significant of all is the way this result will affect negotiations on Brexit.
Britain and the EU:
As things stand, the most likely outcome looks to be that the Conservative party will lead a new loose coalition, backed primarily by the DUP. However, while both parties have pushed for Brexit, they may have different views about the terms of Britain’s departure. The prospect of a new hard border between Eire and Northern Ireland is certainly not relished, and the Tory party itself is likely to see considerable infighting as it seeks to reshape its policies and outlook. This was evident last night in the words of the former chancellor George Osborne. Speaking to the BBC as the results were coming in, he said: “Theresa May is probably going to be one of the shortest serving prime ministers in our history… Hard Brexit went in the rubbish bin tonight.”
In light of all this, we can certainly expect short term upheaval but it’s important not to lose perspective. For one thing, hard or soft, Brexit negotiations were always bound to take time and they will be negotiations, after all. With the UK on one side and the other EU member states on the other, the process will inevitably entail compromise. No one, whatever their political convictions, can yet foresee or determine the result. Is a softer Brexit now more likely? Possibly, but the final outcome is still a long way off.
Timescales for government:
In a worst-case scenario, neither of the two main parties would find themselves able to form a workable government and, under the rules of the Fixed Term Parliament Act, the country could then be forced to conduct a second General Election later in the year. That would prolong the uncertainty for a few months but no more. Given the reluctance of the parties and the electorate to engage in yet more campaigning and voting, party leaders will be doing all they can to avoid that eventuality.
More likely is that one of the two main parties will form a working alliance and seek to govern on a minority basis. ‘Strong and stable’ might not be the best terms to describe such an administration, but the business of government must go on.
The private sector:
Moreover, whatever form the next government takes, the private sector will not postpone its plans indefinitely. At the domestic level, firms still have profits to make, employees have jobs to do and people must still find homes in which to live. And at the level of the big corporations, the tribulations of the British political system are not always going to be top of the agenda. Indeed, the FTSE 100 index rose 0.9% over election night as big business weighed the likely impacts of a falling pound against the value of profits made overseas.
In short, business continues regardless. Conditions might change but companies adapt and markets continue to trade. For investors, it’s often best to look beyond the froth and foam of daily news reports and look instead at the bigger picture. The property market illustrates this well.
The property market:
Going right back to first principles, any student of economics will learn that price is essentially a product of supply and demand. Currently, and for a considerable time, demand for housing has remained exceptionally high. The effect of that has been to push prices upward.
Supply, on the other hand, is still notoriously low. The rate of house-building has failed to keep pace with demand over the course of numerous governments. Low levels of supply tend to favour vendors because they own a scare commodity and can count on a healthy number of potential buyers to bid up the price.
The present combination of low supply and high demand has been (to borrow a phrase) strong and stable for many years. It has buoyed up the property market despite a raft of adverse conditions and uncertainty. People must have places to live. That demand will not, cannot go away. Excess demand therefore manifests as rising prices and, where home-seekers cannot afford to buy, it manifests as healthy demand for rental properties. Both outcomes are good news for investors.
The complicating factor is affordability. Currently, real term wages are failing to keep pace with inflation so people, on average, are essentially getting poorer. This limits people’s ability to secure a mortgage and so it has a braking effect on market prices overall.
What this amounts to is a balance. Market forces tend naturally to push prices up, but the current stagnation in average standards of living is tending to pull those prices back. Predicting where the balancing point will settle is a tricky task but the prevailing opinion amongst industry professionals seems to be that the forces of supply and demand will always win out in the end.
Property price rises forecast:
On the 8th June, the day of the election itself, the Royal Institution of Chartered Surveyors said that the “overwhelming majority of its members expected prices to rise across Britain by around 3.5% each year during the next five years, despite signs that the market has become more subdued recently.”
Average price growth has undoubtedly slowed in recent months but that it has nevertheless remained positive. Importantly, the rate of growth remains significantly ahead of the rate of inflation – unlike the returns achievable on most ordinary high street savings accounts and similar alternative investments.
Simon Rubinsohn, RICS chief economist, said: “Although the latest survey suggests that uncertainty related to the general election may have contributed to what appears to have been a disappointing level of transactions in the housing market over the spring… contributors still expect house prices to increase at a faster pace than wages over the medium term.”
Brian Murphy, head of lending at the Mortgage Advice Bureau, said: “What’s apparent from the report is that house price growth is still in positive territory with ‘modest gains’ in most areas … When all is said and done, surveyors up and down the UK are observing on the ground what many others in the industry suspect: those who need to move are doing so, and those who are seriously considering it are just holding off for a few weeks and then, regardless of the election result, are likely to get on with it.”
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