There is no doubt that the last few days have been an unprecedented disaster for Theresa May. She has been severely weakened as leader of the Conservative Party, ridiculed as Prime Minister of the UK and forced to tender her resignation before the next election. To top it all, many political observers are waiting for Jeremy Corbyn to file his own no-confidence vote in the UK government. So, what does this mean for the UK property market?
Project fear in full flow
As we approach the crucial date of 29 March, even though there is already an agreed transition period up to December 2020, property investors are becoming concerned. They are concerned about the outcome of Brexit negotiations, the UK economy and the employment market. If you take a step back and look at the situation today, there is little in the way of encouragement for a recovery in the short to medium term. However, property prices may have softened but the expected crash has not occurred as yet and does not appear to be imminent.
While a no-confidence vote tabled by Jeremy Corbyn would just about finish off the worst week in the life of Theresa May and the Conservative party, in many ways this is irrelevant. We also have the European Union happily sticking the boot in when the UK government is at its lowest ebb. The reality is that even in the midst of a nightmare scenario for Theresa May recent polls still suggest she is the more favoured Prime Minister over Jeremy Corbyn. It is fair to say that a Labour Party with any other leader would probably be in power today but the ground swell for a general election has faded and Jeremy Corbyn has become his own worst enemy.
The main concern for the UK economy is the uncertainty surrounding Brexit at this moment in time. Attempts to blackmail rogue Conservative MPs into accepting Theresa May’s flawed Brexit agreement have failed dramatically.
We are starting to see signs of companies in the UK relocating part of their operations to Europe, to remain within the European Union, and delaying significant investment in technology, staff and marketing campaigns. This was to be expected whether the UK was heading for an actual Brexit deal or not, we are in uncharted waters and there are many technicalities to address as well as the bigger picture. It is inevitable that delayed investment in UK businesses will hit the employment market in some shape or form. This may be a short-term jolt and then a recovery although this will also impact consumer spending, company profits and place yet more pressure on the jobs market. A vicious-circle unless the authorities are not careful!
The performance of sterling, which recently hit an 18 month low, is something of a double-edged sword. On one hand, imports would become more expensive and therefore place upward pressure on inflation. However, a weaker sterling could resurrect the UK export market, breathing new life into the manufacturing industry and offer something of a long term lifeline.
Property investor sentiment
It is fair to say that the UK property market has held up far better than many people could have expected in their wildest dreams. There has been a gradual deflating of the property price bubble which took London and the South-East of England onto a different level than the rest of the UK. But surely this was to be expected?
These two areas of the UK saw house prices increase dramatically over the last decade despite coping with the financial aftermath of the 2008 worldwide economic collapse. Those who write-off London and the South-East of England do so at their own risk as these are markets which are prone to more pronounced movements in boom times and bust times compared to the rest of the country. They will be back, once investor sentiment steadies, and the UK begins to plot a new path in a new era – with some degree of certainty regarding Brexit.
Even though London and the South-East of England continue to grab the headlines regarding property prices, the rest of the UK has on the whole held up remarkably well. It would appear that some investors have finally woken up to value for money in the property markets outside of London and the South-East of England. Rental yields in the high single figures, and even double digits, offer much sought-after cash flow while property prices find their level. We’ve even seen property investors cashing in their “London premiums” and looking to acquire similar sized properties outside of London for a fraction of the price. Areas such as Birmingham, Leeds and Manchester are also attracting the likes of Channel 4 and HMRC who have relocated thousands of staff from their London offices.
The HS2 train link, although delayed, has already prompted significant public/private investment to redevelop parts of Birmingham much of which is needed to support the growing student community. If we take Birmingham as one example, a staggering 49% of graduates remain in the city to take up a working career after leaving university. When you bear in mind there are in excess of 50,000 students in Birmingham, there will be strong demand for rental accommodation for many years to come. Birmingham is not unique in this type of situation with many more cities benefiting from the reduced focus on London and more focus on regional markets.
When you consider the significant drop in sterling over the last two years it is a little surprising we have yet to see a flood of overseas investment into the UK property market. The reality is that many investors were waiting on the side-lines ahead of the outcome of Brexit negotiations before committing themselves. At this moment in time we are no nearer a resolution for Brexit but further falls in the pound must surely be tempting some investors to jump the gun and pick up some UK “bargains”.
As and when Brexit is resolved, whether this is a delay, a no deal or a full trade deal, many experts believe there is a significant wave of investment moving towards the UK property market. On a domestic front, any pressure on employment numbers will obviously impact consumer spending, first-time buyers and could place pressure on those who took out mortgages at the limit of their finances. At this point it is also worth reminding ourselves that UK base rates are near their historic low and the Bank of England has already suggested it will “do what is required” to reduce the impact of Brexit. Whether their hands may be tied to a certain extent if expensive imports push inflation higher is debatable but the government and the Bank of England will simply need to support the economy during the inevitable volatility which lies ahead.
It is difficult to see any reasons to rush into property investment at this moment in time although you could argue we have reached the bottom, the worst-case scenario, in light of Theresa May’s challenge by fellow Tory MPs. Some experts believe that pent-up concerns regarding Brexit may well start to emerge with sellers reducing their asking price, buyers in the ascendancy and in no rush to invest. True, there may well be some pent-up sellers out there but whether this will prompt panic selling is a whole different question. We are more likely to see a gradual softening of prices in London and the South-East of England and perhaps a trimming of growth forecasts across the rest of the UK.
In light of the 2008 worldwide crash the UK government and the Bank of England introduced various financial safeguards. It is possible these could be tested in the short term, if concern and uncertainty grow ahead of more positive news on Brexit, but highly unlikely we will return to the level of mortgage defaults and economic distress of 2008.
You could argue that Brexit uncertainty with a high chance of a no deal Brexit on the horizon is the worst-case scenario. Remainers are dismayed at the lack of a so-called “People’s vote” while those who voted to leave the European Union are angry about the way that negotiations have been managed so far – no real winners. If there is one indicator you should be monitoring over the coming weeks and months it is the money markets and the movement in sterling. Over the last few months, while concern grew about Brexit and the potential consequences, the currency markets remained fairly steady on hopes of a more positive outcome. These markets have turned down over the last few days but staged a partial recovery when Theresa May won the confidence vote.
Whether or not this turns out to be the darkest hour before the dawn remains to be seen but continuous talk of a crash in UK house prices seems a little farfetched.