Resilience of UK Properties in the face of Brexit

In-depth review of the uncertainties for the UK real estate market due to Brexit, in light of the various types of Brexit options the UK can target.

As the British Pounds falls to its lowest, since the flash crash of 2016 (Inman & Davies, 2019), investor confidence in anything British continues to tumble, gearing to be more tumultuous now than ever before.

Traders are worried about United Kingdom’s departure from the European Union in less than a months’ time and most of the experts consider this slump to be the work of investors merely reacting to the prospect of a no-deal rhetoric. In such a perplexing series of events – Nigel Green, CEO of DeVere Group, one of the world’s leading international financial consultancy agency, reveals a crucial detail (Copper, 2019):

“Since the succession of Boris Johnson, we have registered a 35% increase in investors – both UK domestic and international – seeking to reduce their exposure to UK assets…. The only exception is UK Property.”

THE RESILIENCE OF UK PROPERTY

The ability of UK properties to withstand against such a predominant slump and continue to somewhat prevail is absolutely astounding. Although the entire ordeal is far from over as much remains to be decided, the exact words used to describe the entire situation in the original Halifax report (Britain’s largest mortgage lender) is – a “degree of resiliency” (Collinson, 2019). This means that the property market has indeed defiantly withstood the intense political uncertainty stemming from Brexit, but for how long – no one is quite certain!

This notion is clearly evident by the constant stream of new housing prices, released by a myriad of proprietors, that frequently find themselves embroiled in a slew of doubt and controversy. For example, the same Halifax commending the property market for being resilient was recently subjected to much abasement due to the unreliability of its monthly house price index (Harvey, 2019). Since then, they have released new results under a different methodology.

As you see can see below (Fig. 1), despite fingers being raised, Halifax still ranks as the most optimistic of them all.

Change in UK house prices
Figure 1. Changes in UK house prices (Seggins, 2019)

THE CLASH OF UNCERTAINTIES

However, all of the indexes illustrated above agree on the point that UK properties are no doubt resilient and rightly so. Berkeley credits the stability within the prices to a heavy demand for new homes as well as the laudable employment levels with income surpassing the inflation rate as of this moment. Yet, if the uncertainties of each constituent element of this degree of resiliency is pitted against the uncertainties engulfed within Brexit – a whirlwind of confusion arises that makes matters not only unpredictable but also unfathomable for most of us. Nonetheless, gauging opinions and hypothesis provided by notable institutions and reputable experts, from both sides of the fence, has always delivered the best snapshot of what is at play. With respect to the property market, it might as well be the most ideal way to start planning for the long and the short haul, both mentally and fiscally.

“The one thing that is certain is uncertainty.”

Martin Lewis, Founder of Money Saving Expert

AFFORDABLE AND ACCESSIBLE HOUSING

It comes as no surprise that the scourge of housing spreading upon the British soil is fuelled by a dearth of new and affordable properties. The shocking part is the gap that remains outstanding between what has been done so far and what needs yet to be done. According to a research published by the Heriot – Watt University, 340,000 new homes have to be constructed for 13 years straight from TODAY to adequately meet the demands of the mass population (Bulman, 2019). Furthermore, this research also dictates that 40% of all new constructed homes must be affordable homes, meaning that they should not cost more than 80% of the average housing rent in a given locality (Bulman, 2019).

This estimate means a shortage of 40,000 homes  compared to what the government has promised the British people!

Contrary to solving the challenges associated with the current housing crisis through reliance only on techniques used to temporarily solve the last one (i.e. The housing crisis of 1951), a growing sentiment amongst technocrats and economists is that the current solution is archaic and rudimentary.  

“Building 300,000 houses per year will do very little to bring down house prices in Britain, and next to nothing to raise home ownership.”

Ian Mulheirn, Chief Economist at Tony Blair Institute (Distinct Money, 2019)

This is where, on top of a shortage of affordable living, we get to question the very nature of the problem due to the advent of confounders that further propels the widespread uncertainty to soar to new heights. Distinctively, all critics point their fingers at the prevalence of low global interest rates being the root cause of the rapid increase of property prices. This, in turn, also explains why borrowing has been made so cheap. Such a mechanism enables those who are privileged enough to be able to buy properties and then use them to further ratchet up their borrowing to buy even more and thereby, cause the prices to increase significantly. 

To understand this particular uncertainty in depth, you have to understand that in the financialised economy of the United Kingdom, homes are considered more than just places to live – they are one-of-a-kind speculative asset class. Although real estate in the UK has been at a historic low for nearly a decade now, banks absolutely love lending money against these assets as they generally yield profits greater than any other avenue. Banks also have a dire need to lend, as it is our borrowing that allows the banks to create money – indefinitely. And they do tend to do so, more frequently and more recklessly with each passing generation. This methodology has proven to be so damaging that many experts now openly blame the careless and unaccountable mechanisms through which future prospect is being cashed out (i.e. accumulating debt), leading to the bid of property prices to rise up incessantly (in a fashion similar to the financial crash of ’08). 

“Lower Interest rates raise asset prices by increasing the present value of future cash flows. These effects can be powerful, especially when interest rates are already low”

Bank Underground, Blog of the Bank of England (Harvey, 2019)

However, this lack of accountability has only proven to be beneficial for those who are able to afford properties and outright jeopardising for those who do not possess the ability to do so. First time buyers are usually given the limit to borrow nearly 4 to 5 times their annual income to purchase a home. However, this is usually overshadowed by wealthier competitors who already own homes and are simply buying property to use as collateral to buy even more down the road. 

“Vacant homes now account for £53.6 billion of property in England”

Project Etopia (Kollewe, 2019)

Hence, the already tough market is aggravated by the consistently growing stream of abandoned properties, used as a means of speculation without yielding any benefit back to the society. The government does promise to tackle this with full force, yet, new and affordable properties are not being built fast enough. The highest numbers of vacant homes are situated in the most prime investment locations within the UK. Leading the pack is Portsmouth with Hartlepool on the second and Eastbourne on third. This surely indicates that as everyone braces for the property bubble to burst, the affluent aim to elicit benefit.

In such a set-up, builders get the highest advantage and the greatest prospect, trying their best to construct lavish structures as many times as possible under the premise that construction of any type of housing would be adequate to curtail the effects of the housing crises. To prevent the housing menace from bursting, politicians rely on the creation of “artificial scarcity” where the same overpowered landowners are then offered the protection of the government at subsidised rates through legislations like the anti-squatting laws. Greed allows this vicious cycle to operate efficiently and flourishingly.

“English housing stock has grown by 168,000 units per year on average, while growth in the number of households averages to be 147,000 per year – indicating an apparent OVERSUPPLY as opposed to a shortfall.”

UK Collaborative Centre for Housing Evidence (2019)

This greed in turn fuels homelessness, which continues to rapidly increase to this very day. The number of homeless families presently residing in England has gone up 11% in a single year with child homelessness surging by 80% (Bulman, 2019). The most striking and heartbreaking result is that homeless families can now be found every four minutes all across the United Kingdom (Bulman, 2019). These symptoms of the housing bubble that currently drive the UK property market, are exacerbated by lengthy waiting lists for social homes, frozen housing benefits, and steep private rents. Currently as of 2019, a person is able to sell his home in 77 days in the UK, as opposed to just over 50 days in the 2018.
In April 2018, we witnessed a well-directed intervention under the Homelessness Reduction Act but after a year of service, lead researcher Dr Luke Heshword has this to say (Bulman, 2019):

“Although the number of people who have accommodation has risen, it does not meet demand.”

APPLAUDABLE EMPLOYMENT LEVELS

Now addressing the second element of the resilience of UK Property, laudable employment levels. Figures from the Office of National Statistics suggest that British workers are not only being paid more but are also hired more. Actually, the current levels are the highest seen in the last 45 years (ITV REPORT, 2019).

Wages outsrip inflation
Figure 2. Wages continue to outstrip inflation (BBC, 2019)

Despite high employment and above-inflation wages and counter-intuitively, one in four households facing the risk of homelessness does have paying work in the UK. This year, East London marks the accepted homelessness to be around 1,802 households with more than 40% of these families having paid work. Conversely, rural districts have seen lower rates leading to a grand total of 25% of houses at risk of homelessness not devoid of wages (Jayanetti, 2019). With wages at its heights, unemployment at its lowest, and homelessness still rising – there is something clearly amiss. These statistics demonstrate how dangerously close we have come to the boiling point of the housing crisis and how poorly we, as Britons, understand it. Rather than solving the underlying issues birthing such economic monstrosities, many amongst us still aspire to reduce the number of ‘external’ people being welcomed by the British government (i.e. immigration) in hopes that it would be much easier to start solving the real problems after doing so. There is strength in diversity and nations that systemise it meticulously have most assuredly reached the highest pedestals of civilisation. If history has taught us one thing, it is that the process of assimilation that can never be compromised with inherent system defects is always more worthy of critical attention and likely lead to long term prosperity.

UK House price inflation
Figure 3. Slowing down of house price inflation (Denton, 2019)

BREXIT – A DILEMMA

To gauge the uncertainty surrounding Brexit, for the sake of pitting against the resilience of properties, it is easiest to mention the options it currently encompasses and note the speed at which new ones are added onto the existing “portfolio of choices”. The present options range from the Customs Union, The EFTA, the Common Market 2.0, Maul’s version of the Brexit Deal, The Labour Party’s Plan and the Malthouse Compromise (Randerson and Cokelaere, 2019). Debates in the British Parliament, under the umbrella of such deals, resonates quite similar to how Julius Caesar found our ancestral Insular Gauls nearly 2 millennia ago, are divided and weak.

Moreover, there is also no consensus amongst leading institutions upon the effects of even the most debated deals of them all – the ones comprising the “no deal” rhetoric. KPMG suggests that the average property in the UK would fall by nearly 6.2% to 20% (The Week, 2019) as a result of it. The Office for Budget Responsibility predicts that the housing prices could plummet by 10% whereas the Bank of England goes as far as to estimate that 35% of the price may be lowered (Jose, 2018). It is fair to say that the most disastrous situation shall bestow upon patient investors and first-time buyers’ a great opportunity but at the cost of hyperinflation – more so for an unknown duration.

These are merely assumptions of course, made by reputable British organizations and constituencies within the government. But, to properly assess the power of Brexit in destroying the resiliency of UK properties… it has to be classified according to its implications.

IMPLICATIONS

In 2017, RAND Europe published a document identifying the facets of Brexit in terms of its implications that are to result from different choices, dividing the economic effects of Brexit into two main hypothetical categories: Hard and Soft Brexit (RAND, 2017)

HARD BREXIT

For Hard Brexit, meaning the exiting of UK from both the EU’s Customs Union and Single Market, 5 possible scenarios are outlined:

WTO RULES
If proper arrangements are not placed, commerce between EU and the UK would automatically be governed by the bound tariff schedules of the WTO. The UK would have the ability to establish regulatory standards and employ its own tariffs at work. However, these benefits come at the cost of a heavy blow to the GDP (i.e. reduction of 4.9%) over the course of a decade.

UK-EU FTA
In this scenario, the tariffs stay at 0 but the new sanctions would necessitate UK exports to fulfil extra custom measures and origin requirements. This case would be a win-win for both EU and the UK with GDP growth estimated to be around 0.5 and 3 percentage points better than the first option, respectively.

TRILATERAL; US-EU-UK ARRANGEMENT
In the Trilateral arrangement, US aims to substantially reduce NTBs (non-tariff barriers to trade) while eliminating tariffs on both agriculture and growth to lead the UK to gain 7.1 percentage points in GDP, gaining $202 bn.

UK-US FTA
In case of a bilateral accord between the governments of the United States and the UK, a deal would be struck to reduce some service barriers, reduced tariffs, and associative NTBs; allowing the UK to eventually move towards the US standard. The UK’s GDP gains 2.4 percentage points and the US gains 0.2 percentage point in comparison to the first option, WTO rules.

UK – EU TRANSITIONAL ZERO TARIFF ARRANGEMENT
Conversely, many believe that a transitional zero tariff arrangement for an interim period would be sought by the UK. This would allow Britain to gain 2.8 percentage points with the EU close behind at 0.4 percentage points increase the respective GDPs.

SOFT BREXIT

RAND (2017) regards the softer side of Brexit to be one of 3 types:

THE SWISS MODEL
The Swiss model would allow the UK to stay in the Single Market, but only for goods and not for services. They would always be kept tariff free but the NTBs would rise sharply as the trading of services is always directly proportional to the WTO bound rules. The UK is seen to gain 2.5 percentage points in the GDP with a slightly better economic outlook for the future as well.

THE NORWEGIAN MODEL
In this scenario, the European Economic Area retains UK as a member with unlimited accessibility to the EU single market but takes away the British right to the customs market. This would allow the UK to be able to structure its own independent trade policy with extra tariffs and NTBs to fulfill. The expected percentage increase of points in the GDP is 3.2

CUSTOMS UNION COVERING GOODS
Lastly, the UK would be able to independently negotiate its FTAs with other countries while retaining membership to the customs union only for goods but not for services. This route shall make UK less independent but the privilege to ensure undeterred trade with the EU block shall be gained. The expected percentage points of GDP to be gained by the UK as a result is around 3.1.

CONCLUSION

The various facets of Brexit demonstrate the complex interrelation between EU, US, and the UK, fuelled by economic dependencies and found maturing ever since the conclusion of World War II. UK is looking to gain the highest amount of independence without relinquishing healthy trading relationship with its neighbours. However, with troubles brewing at home in tandem with the inability to quickly come to a consensus on the way forward for Brexit (the inability to take decisive decisions is already costing us £500 million a week since 2018), a hasty resolution may be the biggest mistake as it might show resolve but also the lack of foresight. This is precisely why there is a rampant confusion within both Conservative and the Labour Parties. The liabilities placed by the EU forces Britain to either silo itself or be part of a network that was formed on the 1st of January 1973.

These evidences are indicative of the power wielded by Brexit but even resolving it amicably is only part of the solution. Therefore, it is imperative that a resolution is opted that allows trade to remain undeterred between nations, at least until housing and the governance regulating housing is remedied of all its shortcomings.

The resilience of properties is going to be further tested in the coming days and Zisk Properties considers this as a golden opportunity for first time buyers to climb onto the property ladder. It might also be the only chance UK millennials have of grabbing onto homes to call their own as many viable investment options shall arise in this endeavour of the UK to be sovereign and autonomous. This also means, this is likely a ripe opportunity for investors to take measured risks and invest in UK properties. Continue on to review our specialised property listings now and gain access to hidden gems (of properties).

REFERENCES

  1. BBC. (2019). Wage Growth stays strong as unemployment falls.
  2. Bulman, M. (2019). UK facing its biggest shortfall on record with backlog of 4m homes, research shows.
  3. Collinson, P. (2019). Property market resilient despite Brexit uncertainty, says Halifax.
  4. Copper, Christopher. (2019). 35% Increase In Investors Seeking To Reduce UK Exposure Since Johnson Became PM.
  5. Denton, J. (2019). Property Market to remain dogged by Brexit.
  6. Distinct Money. (2019). Building more new homes WON’T solve Britain’s housing crisis.
  7. Harvey, E. (2019). Halifax house price update: which UK price index should you be following.
  8. Inman and Davies. (2019). Pound Falls to Lowest Level In Three Years As Brexit Clash Looms.
  9. Jayanetti, C. (2019). 25% of households at risk of homelessness are in work.
  10. Jose, P. (2018). House Prices would plummet 35% in no deal.
  11. Kollewe, J. (2019). Number of empty homes in England rises to more than 216,000.
  12. RAND. (2017). Alternate forms of Brexit and their implications for the United Kingdom, the European Union, and the United States.
  13. Randerson, J., and Cokelaere, H. (2019). UK’s Brexit options – an illustrated guide.
  14. Seggins, R. (2019). Change in UK house prices.
  15. The Week. (2019). Would London house prices plummet after a no – deal Brexit?
  16. UK Collaborative Centre for Housing Evidence. (2019). Tackling the UK housing crisis: is supply the answer.
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