In 2020, we covered a broad range of topics – the coronavirus pandemic, Stamp Duty, interest rates, legislation and many others – but we wrote very little about one of the biggest economic stories in decades. Brexit – Britain’s departure from the European Union – has been looming over us for years, so perhaps we ought to explain our apparent silence.
One reason is that the issue was so highly politicised and divisive. It was difficult to write anything without causing offence to one camp or another. More importantly, the negotiations themselves took so long that, for literally years, it was almost impossible to make any definitive statements. Everything associated with Brexit had to be couched in terms of ‘claims’ and conjecture rather than being delivered as hard and verifiable fact. Indeed, for a long time, the only certainty about Brexit was the uncertainty it was causing. The two words ‘Brexit uncertainty’ often appear hyphenated in newspaper and magazine articles, creating a shorthand term to cover a host of unknowns.
Happily, many of those unknowns have now been put to rest. Like it or loathe it, an agreement has now been reached, and the terms of the country’s future relationship with Europe have been set out in black and white.
For business, this is welcome news. Uncertainty is the enemy of investment, and if you’re a multinational employer thinking about a major new construction project or creating hundreds of new jobs, it’s far better to do that when you have a clear view of the economic landscape in front of you.
These things are important to property investors, too, because the health of the economy has such a pronounced effect on investment returns. In this article, we’ll consider some of the most important consequences of the newly signed Brexit agreement, and what they mean for the UK residential property market.
Property and the UK Economy
Money drives all economies. It’s a basic measure of demand and national productivity, and the less of it there is in circulation, the slower the economy tends to move.
House prices, like all prices, are the result of the market finding a balance between supply and demand. Supply is determined by factors such as existing housing stock, the rates of house-building and residential property conversions. It’s widely accepted that there is a significant national shortfall in supply, which means that a relatively large number of people are chasing a relatively small number of properties. That gives rise to price competition amongst buyers and tenants, which tends to drive values upward.
The other fundamental economic force is demand and, more specifically, people’s ability to pay. When people have higher average disposable incomes, price competition intensifies and capital values tend to rise. (Exactly the same principle applies to demand for tenancies and rental values.) Historically, charts show clear parallels between average incomes and average house prices so, all else being equal, investors usually stand to make the strongest gains during periods of robust economic growth.
There are exceptions, of course, and 2020 was one of them. Conventional wisdom would have said that at a time when millions of people were living on furlough or losing part-time jobs, average incomes would fall, and that house prices would fall with them. That clearly didn’t happen – Nationwide estimates that prices rose by over 7% over the course of the year. But that could be ascribed to exceptional circumstances: an increasing desire to move and find more living space during the pandemic; pent-up demand after the lockdown; and – perhaps most significantly – the Stamp Duty holiday.
Under more usual conditions, falling incomes tend to slow price growth, whereas economic growth and rising living standards tend to support a more rewarding property investment market. That’s one reason why Brexit is an important factor in the housing market. Many economists and commentators have associated Brexit with the threat of economic contraction. They have argued that by moving away from its closest and largest trading partner, and by presenting businesses with more hurdles and administrative costs, Britain could see comparatively slow economic growth in the years ahead.
Importantly, these aren’t predictions made by people with an obvious political agenda. In December, for example, the BBC’s Reality Check correspondent Chris Morris wrote: “This is not a normal trade agreement. Trade deals are designed to make trade easier and cheaper, by bringing countries closer together. This one is pushing the two sides further apart. It ends frictionless trade between the UK and its largest trading partner, creating extra costs.” He also noted that any new deals signed by the UK “will not replace trade that will be lost with the EU.”
In a similar vein, the Government’s own Office for Budget Responsibility (OBR) estimated that over the next 15 years, the UK economy will be 4% smaller than it would have been if it had remained in the EU. However, that’s considerably better than its forecast for a no-deal outcome, which it believes would have been 2% worse still.
Of course, we must also recognise that the OBR’s figure of 4% is only an estimate; a comparison between predictions, and one that was made in March last year. No one knows what will actually happen between now and 2035. Even if the recovery isn’t as fast as it might have been, the country is still expected to achieve positive growth in the coming years. With the new deal, the economy should soon see improvements in commercial investment and productivity, especially if the new Covid vaccines live up to expectations. The two factors together should certainly create improving conditions for investors.
A year ago, many lenders, estate agencies and professional institutions were in clear agreement that house prices would fall in 2020 – some forecasting dire reductions of 10% or more. Gradually, however, as the reality of the house price boom became apparent, those forecasts were amended and updated.
Today, there is a mix of forecasts but the majority now seem to be bunching up around the ‘zero’ mark. There is a widespread expectation that prices will stay relatively flat this year, as the market takes account of rising unemployment and the likely end of the Stamp Duty holiday, unless the Government vote to extend.
Until very recently, all these projections had been caveated with stern warnings about a no-deal Brexit. Generally, they were based on the assumption that the UK would find some reasonable way to trade with its European neighbours. In the event of no deal, they warned, the projections could be substantially worse.
Now, of course, we have a deal. It might not be frictionless, but crucially, it avoids the spectre of trade tariffs. These could have posed a considerable threat to average incomes (and therefore to average property values) because additional tariffs on everyday items could have seen weekly shopping bills rise alarmingly. Sky News estimated that “No-deal would have seen tariffs slapped overnight on everything from cars to carrots, raising the price of a family saloon by £1,900 and adding nearly a fifth to the price of the weekly shop.”
Any such hit to people’s disposable incomes would almost certainly have translated into less willingness to take on bigger mortgages or to live in rented accommodation that stretched the purse strings too tightly. Or, to put it another way, avoiding no-deal might well have helped to forestall a sharp decline in both house prices and rental values. The Daily Express summed this up in January, noting that “the post-Brexit trade deal has removed the biggest threat to the housing market in 2021.”
Brexit and the Security of the UK Property Market
We have more in the 2nd half of this article, where we cover topics such as Employment and Housing Demand, Brexit, Travel and Tourism, Foreign Investment in UK Property, Brexit and House Building, this is being provided as a FREE download at the end of our up coming webinar, Brexit and the Security of the UK Property Market, Tuesday 26th January 2021 at 7pm. We will be discussing all things Brexit and how we see it effecting the UK property market, especially the investment market. To register to watch this and get access to the free PDF guide on Brexit and the UK Property Market please visit the registration page by clicking HERE.