Brexit and it's impact on the property market

Brexit and it's impact on the property market

25th Aug, 16

With the technology in this day in age, it does not take very long for news to travel from one corner of the world to another. It's just a matter of a couple of minutes, and the whole world will be aware of a particular political announcement. There was no exception to the Brexit scenario.

How did it happen?

Brexit is an abbreviation for the British exiting the European Union. This particular term came about after a referendum was passed on June 23, 2016 which involved the British citizens voting to separate from the European Union. Even though it was a tough call, the voting percentages were 52% and 48%, with most of the British citizens favoring the separation.

The political background

In 2012, the British Prime Minister David Cameron denied all potential referendums regarding UK's membership in the European Union. However, he did state that a future referendum could be possible to gain the country's support. David Cameron was not the only person who was not for this notion. Along with him, the US President Barack Obama wanted UK to remain a part of the EU joined by France and Germany having similar thoughts regarding the situation.

So it was no surprise when the unexpected decision did take place, there were chaos, panic, and shock spread out among the whole country. The first thing that the nation heard was that the Prime Minister had decided to resign in October. Soon, on July 13th 2016, he stepped down and Theresa May arrived as the new PM. Along with this, Philip Hammond replaced George Osborne as the Chancellor of the Exchequer. David Davis also obtained the position of Secretary of State for separating from the EU and Boris Johnson also came as Secretary of State for Foreign and Commonwealth Affairs.

How was the UK housing and property market affected?

The domino effect

Besides the political changes and crisis situations, there were significant impacts on the overall economy of the nation. We saw instant changes in the UK housing and property markets as house prices fell while the consumer confidence also dropped; all this resulted in bank stocks falling tremendously. How did this make the bank stocks fall? It’s quite simple to understand as the housing market and banks are tightly connected. If house prices increase people may not have the budget to buy which will have direct impact on the lenders business, the lenders being the banks.

The facts and figures

Before Brexit, the UK Treasury predicted and warned people that the prices would suffer greatly as a result of leaving the European Union. Even though the effects spread throughout the UK, the most noticeable changes were in London. The asking prices in the country have experienced a downfall on average; they dropped by 0.9% (which translates to £2647). Whereas, the fall in prices recorded in London were greater as they decreased by 2.3%, which translates to £19,501. Usually, people will agree that prices fluctuate once in a while, but such significant changes are not healthy indicators. At this time of the year, people will opt for buying and selling houses so that they can move into a new house before Christmas. Due to this, the price changes should be stable, and the opposite of the current situation. The housing prices deteriorate not only compared to the previous month but also in the earlier year. For example, in the prior year, the annual change was 3.3%, whereas the new annual change is -0.7%.

All these changes and fluctuations are crucial to notice since the past few years as the housing prices have always been rising. During this time, the economy has been steady and experienced low interest rates, high employment rates, and the demand and supply balance that was ideal. After the Brexit step, the situation is slightly similar in a few ways, but numerous banks and researchers believe that a recession is on its way. According to a few economists, this is just the beginning. They have predicted much worse scenarios ahead.

The Royal Institute of Chartered Surveyors believes that housing prices will hopelessly collapse within a short period. It stated that it already warned investors about the disasters that were awaiting them. It also said that the inquiries of the latest buyer dropped by a large proportion. In June 2016, 36% more chartered surveyors recorded a fall in interest; this measurement is a part of the June housing survey. The calculation has been the lowest recorded since the 2008 financial crisis, which shows the intensity of the Brexit crisis and it's just begun! More than one-fourth of the surveyors are predicting housing rates to drop much further than they already have for the next three months to come. Predictions like these are known as the most negative ones that the UK economy has seen since 1998.

According to a research company LonRes, the price cuts were not beneficial in any way. Usually, when markets deliberately reduce costs, the motive behind it is to increase profits in some way. But in the current situation, profits suffered terribly. Their presence could have been helpful if the impact on sales was positive.

Before the British citizens voted upon the 2016 referendum, economists predicted that the price of houses would fall within the range of 10%-20%. Whereas, a famous researcher at Bernstein, Mark Burrows, and his team of experts predicted that the prices could fall by a rate as high as 30% as well. The figure was recorded to be almost twice as high as it was during the former Chancellor George Osborne's rule.

Conclusion

Many people may ask whether the UK housing market is still stable or not. Well, it can be termed towards the firm side but not as much as it was before. There is also some proof that the rate of housing started to slow down during the months before the referendum. There was also an impact on the housing market because of the global economic growth that has been declining. We cannot blame the Brexit issue entirely for the increase in prices since there are numerous factors responsible.

As previously mentioned above, bank stocks would have a severe impact because of this situation. Since the stocks are down, the banks' lending ability decreases. As a result, people will be able to build fewer houses. Under these circumstances, the borrowers cannot access enough land and property to meet the demand of houses in the UK. In the long term, such actions cause the prices to rise again as a domino effect. Many similar long-term possibilities can lead to economic development eventually. We also need to remember that any form of growth is positive, whether it is fast or slow-paced.

The world saw the Brexit news as a dilemma for the UK and the European Union. People were confused about what the next step would be. The present situation may seem disastrous and difficult to cope with, but the results in the next few years have high chances of being fruitful. Brexit may be a success after all for all the citizens of Britain.