Brexit won’t pop the bubble II

Exactly one year today we featured a post titled ‘Brexit won’t pop the bubble’, delivering a perspective on how we feel UK property markets could fare during the short term under a post-Brexit environment. This post works as a sequel, providing an overview of the market over the last 12 months and coming up with a fresh prediction for the next 12 months.

Many wouldn’t have envisioned the rollercoaster of a journey it’s been for UK politics and indeed global politics in 2016. Then again Leicester FC won the premier league, so maybe the air of unpredictability isn’t just a political issue. However, judging by the results of the snap election on June 9, it appears this exhilarating ride isn’t quite over.

Looking into Europe, there was the sense that the ‘Brexit bug’ will descend to other European countries and attempt to dismantle the European Union. This would have given the UK first movers advantage and provided a stronger hand in the negotiation table. However, that wish has now but surely been dissipated, with France and the Netherlands seeing neither far right parties winning their respective elections.

Navigating back to the UK, FX continues to remain weak, with Sterling as at 26 June 2017 closing at $1.2738 and €1.1370, down 14% and 13% respectively on pre-referendum levels. Such falls in the value of the pound has brought new opportunity to foreign investors and institutions looking to take advantage of the currency play. This has been partly the reason why the UK economy has experienced inflationary pressure, with the Consumer Price Index (CPI), a measure of inflation, reaching 2.9% for the month of May. This is the highest since June 2013, and does place increasing pressure from the Bank of England to respond with uplifts in interest rates.

GBP/USD 12 month movement – Source: Macrobond

GBP/EUR 12 month movement – Source: Macrobond

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Has the narrative changed for property buyers?

No. Not really.

A domestic buyer for residential property has possibly found disposable incomes stretched, as the price of consumer goods increase and wage growth stutters over the last 12 months. The combination of factors and the existing issues within the housing market has only increased the challenge for a typical domestic buyer looking to purchase property, which in turn will create a slowdown in activity.

However, with the latest MPC meeting suggesting a greater call for a rise in interest rates, it is likely domestic buyers who are on the cusp of buying property could look to act faster and take advantage of record low mortgage packages while it lasts.

As for foreign buyers, the weakening of sterling has given impetus for further activity within the UK housing market. The UK is having a sale period albeit no one knows when the sale is going to end and so as uncertainty continues to create jitters to sterling, we expect existing foreign buyers to increase allocations or for new entrants to tap into the UK market.

However, it is more than just financial returns. Some overseas investors have either schooled in the UK, had relatives school here or have relatives still within the education system. The desire to buy property in the UK is deep-rooted within the quality of its institutions and its position as a global city, characteristics which far outstrip financial gain.

Now, add this qualitative and intangible aspect to the financial prospects at hand for foreign investors, it is understandable that we are seeing the opportunity to acquire assets grabbed with both hands.

Rapid house price growth in recent years is slowing 

Yet, given the dynamics of the housing market, which heavily involves domestic buyers, any impact effecting household earnings, savings and spending will serve to have a greater impact on the housing market than foreign investors. As a result, property price growth is likely to slow in the coming 12 months, as economic fundamentals and uncertainty surrounding interest rates start to kick (Nationwide have reported an annual house price growth of 2.1% in May 2017, lowest in almost four years). However, a reminder, slow growth is still growth and so we expect property prices to see further uplifts albeit at a rate slower than in recent years.

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