For the past couple of years there has been both constant and considerable discussion over the possible impact of Brexit across all asset classes with the property market being no exception.
Comments hitting the headlines were largely along the lines of those by Bank of England Governor, Mark Carney, who indicated that a ‘hard Brexit’ could lead to property prices falling by up to 35% over 3 years1. We take a more pragmatic approach based upon two points. Firstly, our commitment to identifying property based investments that are likely to perform over the longer term and secondly, reflecting on previous periods of stress in order to understand the worst case scenarios.
To that end, the last period of extreme property market stress was ten years ago over the period of the global financial crisis. Over this period the market showed a huge amount of divergence across regions and the headline housing market dropped a little below 19%2.
With the strong, long term, underlying supply and demand dynamics of the property market (for more information see our blog “Is now the right time to buy property”) together with a buoyant rental market we feel that it is unlikely that prices would fall any further than that. Rather, the downside for property is likely to be considerably smaller since this would be a largely domestically driven constraint rather than a globally driven liquidity constraint.
With a long history of relatively stable property growth, trusted currency, robust property law and overall legal framework, the UK has long been viewed as a property investment destination for many foreign-based investors. Should there be general economic and asset price weakness post Brexit, it is likely that the currency would move further and faster than other prices. This means that, from a foreign investor point of view, the double-whammy of both lower property prices and a weaker currency would make the UK property market increasingly attractive to foreign buyers who typically invest for the long-term.
What is likely to be different would be that any negative move would likely take place over a much shorter time span rather than the 18 months that it took during the global financial crisis. This rapid move would likely be driven by a collapse in market liquidity as both supply and demand collapse away from market-clearing levels and cause transaction volumes to plummet.
The only property buys and sells that would go through to completion would be where a seller is forced to sell and therefore has to pay a large liquidity premium to be able to transact in a timely fashion. This would mean the headline property prices would be considerably lower.
The reality is that immediately the uncertainty begins to dissipate and liquidity begins to return then a more orderly marketplace would lead to the start of a property price recovery. Remember that in this extreme scenario, while the headline property price indices would head lower, that the number of transactions going through to complete would likely also be low. The reality is that as a long-term investment, having the market price level marked down to a lower price point for a limited period of time should not concern investors too much in the short-term.
We also believe that the impact on property prices would vary hugely at the regional level. In order to assess this we carried out some research to investigate the divergence between the pricing of flats versus houses. Where this divergence had accelerated over recent years it indicates that there was more likely to be a pullback in the higher value properties. It may be no surprise that the main areas at risk were in the London commuter belt in areas such as Stevenage, Watford and Luton.
We are mindful that a no-deal Brexit could drive most asset prices, including house prices, lower as uncertainty spikes, confidence collapses, liquidity dries up and transaction volumes plummet. As long term property investors, we believe that an environment like that would offer some very interesting buying opportunities which is something that we are always looking out for. As cash buyers, our ability to provide liquidity and move rapidly would be highly valued by sellers and therefore we would be able to negotiate attractive prices - something that we have demonstrated already. Any short term price challenges are likely to recover over the medium term as the underlying market fundamentals come back in to play, confidence recovers and the UK remains attractive to foreign buyers.