Regardless of the Brexit outcome, UK property prices are still expected to rise into the future. This is why the UK property market still remains one of the most reliable methods to generate long-term wealth. As the fundamentals of this sector are sound, investors can enjoy a sense of stability that might not otherwise be possible.
There is no doubt that we have witnessed some turbulent times within the United Kingdom. The majority of this volatility stems from the fact that the chances of a so-called “hard” Brexit have exponentially increased over the past few months. With even leaders such as the new Prime Minister Boris Johnson admitting that a no-deal scenario is now more of a likelihood than ever before, many investors are left scratching their heads. This is particularly the case for the real estate market, as this sector is traditionally considered to represent a safe haven when compared to other areas. Is this still a sound investment? What other factors need to be taken into account? How can you take advantage of such a changing climate without risking fiscal losses? Let’s take an in-depth look at these understandably important questions.
Putting the Brexit Situation Into Perspective
Those who spoke of a no-deal Brexit immediately following the 2016 referendum were viewed as political and economic pariahs; harbingers of doom and employing nothing more than scaremongering tactics. It now seems as if these individuals were more in tune with the outcome than originally imagined. With major nations such as Germany stating that there is a “high probability” of such a scenario occurring, the markets are logically concerned. This is one of the reasons why the FTSE and other benchmark indicators could be entering into more bearish territory in the coming weeks and months. Indeed, the falling values of the pound seem to indicate that investors are hedging their bets while preparing for the worst. The fact that the so-called “Eurocrats” feel that Boris Johnson is a relatively easy PM to read in terms of policy seems to solidify their perspective that a hard Brexit could very well come to pass. Of course, we will ostensibly have to wait until 31 October before the fat lady sings.
The Translation Into the Housing Market
Putting all potential doom and gloom aside for the moment, we need to take a look at some stark statistics in order to appreciate what has occurred within the UK housing markets. Values have fallen by 16.5 per cent during the last 12-month period. The fact that the government may be cut its base rates before December places even more uncertainty within this sector.
This is not the only concern for property investors. Another key observation emerged from the Office for Budget Responsibility. Officials claimed that a no-deal Brexit would see prices fall by an additional 10 per cent through to 2021. A handful of other figures seem to reinforce the observations highlighted above:
- Aggregate house prices have fallen since the initial referendum.
- Prices within England are particularly weak; showing a per annum growth of just 0.97 per cent.
- Northern Ireland has fared slightly better with an annual growth rate of 3.47 per cent.
All of these observations seem to paint a rather bleak picture in regards to the outlook of the property market sector and yet, we need to take another variable into account.
The Importance of Transactions
Another way to accurately gauge the housing market across the United Kingdom is to observe transaction rates over a given period of time. Once again, this seems to present a decidedly bearish economic outlook. The HMRC has found that the total number of transactions had decreased by 16.5 per cent between May 2018 and May 2019. In other words, many consumers (particularly first-time buyers) are sitting on their proverbial hands; preferring to ride out the perceived storm as opposed to placing themselves in a position that could lead to fiscal woes.
Placing the Reactionary Stance Aside for a Moment
Many politicians and economists alike seem to be jumping on the no-deal bandwagon in recent months. Whether this is due to careful market analyses or simply a desire to feed into a sense of reactionary fervour, the simple fact of the matter is that statistics are not always sound indicators of a future outcome. Furthermore, we must realise that the majority of leaders do not wish to be put into the position of pushing through a hard Brexit (much less a second referendum). Still, we need to return to market fundamentals in order to fully appreciate what has much more of a predictable impact upon long-term housing prices:
- Domestic economic health
- Foreign investment
- Supply and demand
- Inflation and interest rates set by the Bank of England
- Wage increases and decreases
- The introduction of large housing development projects
In other words, Brexit is only a single factor that needs to be taken into account. What is even more important is the fact that even a hard Brexit will likely represent a short-term market “hiccup” as opposed to a financial crisis such as that which we struggled through in 2008.
Another point to mention is that while some economists predict that the benchmark values of the FTSE will fall over the next few years, UK wages have been growing faster than expected. Employment rates are now at a record high and more than 350,000 jobs have been created over the past 12 months. While there are numerous reasons behind this momentum, the simple fact is that more jobs equate to more access to liquid capital. This translates to a more lucrative buying market.
Even if market fundamentals continue to falter and values decrease, this will not necessarily signify that the average consumer will simply adopt a “wait-and-see” attitude. After all, purchasing a home is often a logistical necessity. This is much different when compared to the elective nature of opening up a Forex position or obtaining shares in a UK-based blue-chip company. To put it simply, we always need to recognise the power of market fundamentals before automatically assuming that the housing market will dry up in the event of a no-deal Brexit. This is actually only the beginning in regards to how the market should be viewed from a more well-balanced perspective.
What Defines a Buyer’s Market?
It can be difficult to resist the heaps of doom and gloom which have presented in countless news articles and independent analyses. To be clear, we are not necessarily claiming that such observations are completely unfounded. The prospect of a no-deal Brexit is very much on the table and as this represents what can only be called uncharted territory, the domestic economy could very well take a hit as a result. However, we also need to return back to the basic principles of what is considered to represent a buyer’s market in the real estate community.
Simply stated, a buyer’s market occurs when supply exceeds consumer demand. This is another way of stating that there are more properties for sale than buyers within the market. The reason that such a situation is advantageous involves the fact that potential buyers have more room to negotiate in regards to obtaining an amenable price. This should not be confused with a seller’s market (a situation defined by fewer properties on the market; allowing sellers to raise their asking prices in order to turn a lucrative profit during extremely bullish times). What is even more important is to recognise some of the indicators of a buyer’s market. These include:
- Consistently falling prices over a set period of time.
- The properties themselves take longer to sell.
- A higher level of competition between sellers.
As we have seen from the statistics mentioned earlier in this article, the first two conditions already exist due to current economic instability. Let’s examine this situation from another perspective which the average consumer can relate to.
Would you ever shop at a grocery store known for its high prices? Is it not better to wait until this chain is laden with overstock? In such a scenario, the seller will be forced to drop its prices in order to move excess inventory. This is also why the average consumer will wait until the cost of a specific good or service falls before committing to a purchase. The same holds true in regards to the housing market. The only difference is that it involves a more substantial financial expenditure. This is the very same reason why investors will wait until a certain stock dips in price (often known as a re-correction) in order to obtain a bargain. Why should housing market fundamentals be any different? This brings us to the next major point.
The Importance of Long-Term Fundamentals
We also need to keep in mind the fact that the majority of property buyers are not looking for short-term investment opportunities. They are instead more interested in the benefits of long-term ownership. Hence, this is why mortgages are normally defined in decades as opposed to a handful of years. From a purely longitudinal point of view, the majority of domestic (and even global) financial crises are defined by a comparatively short-term nature. While there is no doubt that this market suffered during the economic downturn of 2008, the fact of the matter is that prices subsequently rose; providing an excellent opportunity for investors (more on this in the following section). This is the very same reason why certain ailing portions of Spain are now witnessing an influx of individuals who are keen to take advantage of a higher return on investment.
Furthermore, many reputed industry experts have emphasised that the strong fundamentals which underpin the property market are likely to remain relatively unscathed from a no-deal Brexit. Let us also highlight that properties associated with the service industry are still in high demand as are locations in major metropolitan regions such as London. Analysts have also pointed out that investor demand is still quite strong (although some are nonetheless adopting a “watch-and-wait” approach). This ultimately signals that the domestic property market should remain solid even if we become involved in a worst-case scenario.
This is arguably the most important takeaway point from the entire article. Property investments represent lucrative long-term ventures. It is therefore much wiser to take a look at the “bigger picture” as opposed to overly focusing upon one-off events such as Brexit or even a global recession due to trade wars. The bottom line is that the United Kingdom is still considered to represent a safe haven and this status is not likely to change any time soon.
Remembering What Leads to a Sound Investment
We mentioned that some investors are adopting a watch-and-wait approach while others are instead keen to become involved with a “ground floor” real estate opportunity. While this might appear slightly speculative, it is actually one of the most prudent steps that an individual can take. Let us consider for a moment a statement that was originally coined by famous investor Warren Buffett:
“Be fearful when others are greedy and greedy when others are fearful.”
Although this tends to run contrary to popular belief, it is nonetheless a very sound strategy. Why purchase a property when hints of a bubble are prevalent (once again taking into account the boom-and-bust scenario of the 2008 crisis)? It is much better to become involved within the real estate sector when others are running for the proverbial hills. As sellers and estate agencies will have more difficulty moving their properties, the associated prices are much more open to negotiation. Furthermore, the chances are high that a substantial discount will be accrued. Finally, even profound dips within the marketplace are followed by more bullish times. This is a historical fact and much like large markets such as the Dow Jones and the FTSE, the housing sector will follow suit.
The Future of the UK Housing Market: Putting it All Together
This article has intended to highlight some of the main points to take into account in regards to the current state of the UK property market. To be absolutely clear, not even the most seasoned analysts possess the proverbial crystal ball. A no-deal Brexit is indeed likely to cause strain upon the economy of the United Kingdom. However, the crucial takeaway point is that property fundamentals still remain quite strong even if the surface appears muddled at the present.
Whether referring to first-time homebuyers or individuals who may be looking to provide their existing portfolios with an extra degree of financial stability, UK real estate still represents an extremely lucrative venture. The key is to remain focused upon the horizon as opposed to any stumbling blocks that might appear along the road. Those who are able to embrace such a circumspect viewpoint should be able to capitalise upon the many opportunities which await.