As we move towards the end of 2018 and begin to consider UK property market prospects for 2019, it can be difficult to see the wood for the trees with Brexit in the way. We have doomsday scenarios, akin to those released after the 2016 referendum, and little if no focus on more positive forecasts for the UK economy. With “project fear” well and truly underway, what does 2019 really hold for the UK property market?
Resilience, resilience, resilience
Over the last few weeks there has been talk of yet more London homeowners selling up, banking their “London premium” and looking for better value towards the Midlands and North of England. When you bear in mind that property values in London have tripled over the last 20 years, perhaps it is logical to look towards other areas of the country which have underperformed?
As we approach the end of 2018, forecasts suggest London house prices were set to fall by 1.7% but will this figure prove accurate? The same Reuters poll has also predicted further falls of 0.3% for 2019 but a 1.5% increase in London house prices in 2020. Time and time again experts have talked down the London market only for domestic and foreign investors to move back in at the slightest sign of weakness. It would be foolish to suggest that Brexit has not created challenges for the London housing market. However, there is still strong underlying support and prices have not fallen anywhere near the doomsday scenarios released on a regular basis over the last two years.
If there is one lasting legacy of the Brexit debacle it has to be the realisation that the North-South divide, taken for granted for many years, is just too large. As a consequence, house prices in the North West of England are expected to lead the way with an increase of 21.6% over the next five years. The rest of the country, excluding London, is expected to register double-digit growth and in all honesty it would be no surprise to see London following suit soon after.
There is great focus on Birmingham, Manchester, Leeds and Liverpool. We have seen major organisations such as HMRC and Channel 4 relocating their head offices from London to Leeds. In Birmingham there is a multibillion pound 20 year redevelopment programme ongoing within the city centre. Universities in these northern powerhouses have created extremely strong demand for student accommodation. It is also worth noting that graduate retention in Birmingham alone is a staggering 49% out of a student population in excess of 50,000.
Sellers winning the battle of minds with buyers
If you look back over the last two years, since the Brexit referendum, we have seen negative forecasts regurgitated and rereleased on a regular basis. Experts have been talking down the economy and the property market with little real impact. London aside, you might be hard-pressed to realise that while growth in property prices has slowed across the UK, prices are still rising. We know that sellers are showing no signs of panic, no signs of slashing their asking prices and buyers have been forced onto the sidelines. Indeed many sellers have decided to withdraw their property listings and are more than happy to shelve plans to move.
Experts believe there is a near 40,000 new build shortage each year in the UK and demand for social housing has gone through the roof. As a consequence, this pent-up demand means any new properties or social housing projects automatically attract strong interest. It is also worth noting that immigration into the UK will still continue in relatively large numbers despite the forthcoming withdrawal of free movement for EU citizens. The idea that the UK will be “closed to visitors” is basically untrue and the current non-EU immigration system will simply be adopted across the board.
Financial crisis, what financial crisis?
Since the UK government and the Bank of England issued a raft of economic forecasts under various Brexit scenarios there has been talk of a financial crisis to beat all before. However, let’s not forget some of the fundamental changes introduced after the last financial crisis which include:
- Increased mortgage deposits
- Withdrawal of 100% mortgages
- More cautious approach to mortgage finance
- Historically low interest rates translating to cheap mortgages
- Greater headroom between property values and mortgage funding
- Constant stress testing of banking sector finances
The idea that, for example, a no deal Brexit would lead to an economic crash in the region of 10% is misleading/highly unlikely. Even though UK interest rates have begun to tick higher from their historic lows, the Bank of England has already said they will remain static in the short term while Brexit is concluded. There is even speculation we could see interest rates tick lower if there were some kind of hit to the UK economy in the short to medium term. So, stronger banking sector balance sheets, risk averse mortgage regulations, historically low interest rates and growing demand for private rental properties/social housing will be more than enough to support the market in the short to medium term.
It seems highly likely that we will see a further softening of London house prices in the short term prior to the finalisation of any Brexit arrangement. The next two years could be challenging for London but experts believe that 2020 will see the cycle turn. Many have written off London as a “busted flush” in times gone by only to see the market bounce back to take centre stage. Do not fall into that trap!
The South of England, especially the South-East, will likely broadly follow the same path as London house prices in the short term. It is easy to forget these are areas of the country, the South-East in particular, which have significantly outperformed the rest of the UK (excluding London) over the last decade. Property investment is a long-term activity and while short-term fluctuations do obviously impact investor sentiment, the long-term trend is still your friend.
Infrastructure investment has also brought the Midlands and the North of England into play. The risk/reward factors compared to London are much more attractive and there is a feeling that investor sentiment is changing. However, once the dust settles on Brexit it would be foolish to dismiss a recovery in London prices in the medium to long term.