02/02/2018 by Robin Gregson
Brexit and the Property Market - Part 1
Brexit is a fraught political issue and it's difficult to make statements about its impact without them being interpreted as some kind of political statement. Nevertheless, Brexit is undoubtedly the single biggest issue affecting the near-term economic future of Britain and, as such, it is bound to have a significant impact on the private property/rental/investment sector. It is not an issue that can sensibly be ignored.
In this two-part article, we'll therefore try to separate the economic data from the political spin by examining views and research published by various independent bodies. In this way, we'll try to give some sense of what it all means in practice for investors.
Property and the Economy
As a broad rule of thumb, property prices in recent decades have tended to rise in parallel with average earnings. When ordinary Britons feel financially secure, consumer confidence rises, people feel more ready to buy new homes, and tenants feel more able to pay higher rentals. In short, a growing economy is good news for property investors.
Of course, the usual caveats apply: a healthy economy will not affect all regions equally. Capital values and rental growth will always vary between counties, towns and neighbourhoods. But this is not to dismiss the importance of the prevailing economic climate; it does inevitably affect consumer sentiment and this, in turn, can have a significant effect on market conditions in general.
Brexit is Coming
According to Theresa May's current plan, Britain will leave the EU on 29th March 2019. Negotiations are still in progress but the latest feedback from Westminster, the media and the continent appears to suggest that the country will then enter a transitional period, during which it will continue to abide by EU rules (including those relating to market access.) The length of this transition under a 'Norway-style' arrangement has not been determined but many commentators are expecting it to last around two years.
It is, of course, impossible to predict what will happen at this point, and at any future point that Britain leaves the EU entirely. However, there should be at least one undeniably positive outcome, which will be a eduction in economic uncertainty.
At present, business investment is being hit hard by the uncertainty surrounding Britain's future relationship with the EU and trade with the rest of the world. Economists can argue the current and future impacts of that, but as negotiations progress, so that uncertainty must lessen. That will give businesses a firmer foundation for their plans and that, in turn, should see renewed investment to fuel growth and new employment.
In January, the Chancellor of the Exchequer, Philip Hammond expressed a similar sentiment, saying: "Because of the negotiations that are going on, there's a degree of uncertainty about our future direction and our future arrangements for trading with our European partners... That's bound to have an impact on thinking about the economy. The sooner we can generate certainty, the better, and that's why we are keen to build on the momentum that we generated in December; to get the negotiations moving forward in a steady way so that we can see real progress over the course of the coming months."
In some respects, it's arguable that Britain is at its lowest point in terms of uncertainty. It has, beyond any doubt, damaged growth and investment, and it has seen some important employers take flight to France, Germany and other faster-growing economies. But this situation will not last indefinitely; over the coming months, trading terms will be agreed and - for better or for worse - businesses will have a much clearer idea of where they stand.
The Economic Impact to Date
The future will always remain unclear but now, one and a half years after the Brexit vote, we can begin to see what the impact has already been. To do that, let's consider some independent views and reports.
The International Monetary Fund regards the prospect of Brexit as a force that, on balance, will tend to slow Britain's economic growth. On 22nd January, it reduced the UK's growth forecast for 2019 from 1.6% to 1.5%. This prediction comes at a time when the global economy is widely regarded to be recovering well. The intergovernmental organisation OECD has a similar outlook, referring to "the ongoing slowdown in the economy induced by Brexit."
In December 2017, the FT published a lengthy report on the impacts of Brexit, noting that "with 15 months of detailed UK data, it is now possible to begin to answer that important question... Economists for Brexit, a forecasting group, predicted that, after a 'leave' vote, growth in GDP would expand 2.7% in 2017. The Treasury expected a mild recession. Neither proved correct. The 2017 growth rate appears likely to slow to 1.5% at a time when the global economy is strengthening."
The report goes on to estimate, based on figures from various sources, that Britain's economy is now 0.9% worse off than it would have been had the country chosen to stay in the EU. Referring to the infamous campaign claim that a 'leave' vote could free funds to better fund the NHS, the FT adds: "That (0.9% reduction) equates to almost exactly £350 million a week lost to the British economy; an irony that will not be lost on those who may have backed Leave because of the claim made on the side of the bus."
This estimate is echoed by Jonathan Portes, Professor of Economics and Public Policy at King's College London. In December 2017, he said: "The conclusion - that, very roughly, Brexit has already reduced UK growth by 1% or slightly less - seems clear."
It isn't hard to find evidence to support these views, but as Julian Jessop, Head of the Brexit Unit at the Institute of Economic Affairs explains, the more important question is not how things currently stand but where they are going. Speaking in December, he said: "Lots of sensible Brexiters accept there will be a short-term hit, and it is unarguable that the economy is weaker than it would have been... between 0.5% and 1% weaker. As for the longer term, it’s all to play for. Brexit creates lots of opportunities; it is for the government to make the most of them."
In our next post, we'll look in more detail at some of the key economic factors affected by Brexit - exchange rates, inflation, interest rates etc.- and, with the world economy recovering strongly, we'll consider some important new grounds for optimism.
If you have any concerns over Brexit and the future for investing please feel free to contact one of our consultants on 01244 343 355 or email firstname.lastname@example.org