How would a Brexit affect the property market in the UK?
Industry participants have forecast a slowdown in residential and commercial property markets in the lead up to polling day on 23 June.
There is nothing particularly unusual about this; it is common for political uncertainty to have a stagnating effect and the debate over Europe will be no exception. What has proved more interesting, however, is the anticipated effect on the property market in the event that Britain votes to leave.
A report commissioned by the National Association of Estate Agents and the Association of Rental Letting Agents (the Report) suggests that a Brexit is likely to reduce demand. There are multiple factors at work here:
Lower immigration rates if, as is expected, Britain opted not to maintain the current free movement of people agreement with the EU. Indeed, the Office for National Statistics estimates that the population could be up to 1.06 million smaller in 10 years compared with principal forecasts.
The relocation of foreign firms to other EU countries in order to gain access to the single market. This has the potential to impact on both commercial and residential property if a substantial number of employees elect to move with them.
The UK property market may be perceived as a less attractive option for foreign investors, particularly in light of the political and economic uncertainty that would exist as the details of the transition are worked out.
A reduction in the demand for property would impact prices. The Report estimates that the average UK house will be worth £2,300 less by 2018 if Britain votes to leave. The effect will be worse in London, where the average house will be worth £7,500 less; that is a cumulative reduction in value of £26.5bn. These figures are in line with forecasts from other sources. Indeed, the IMF envisages a “sharp drop” in house prices and the Treasury has suggested that prices would be between 10% and 18% lower than base level projections by 2018. Although this might be good news for first-time buyers, the Treasury believes that any benefit is likely to be outweighed by increased borrowing costs and a decline in real wages.
A vote to leave may also impact on the UK's housing supply. According to the Report, 4.7% of the workforce and 9% of sole proprietors in the construction industry were born in other European countries. Greater restrictions on foreign workers coming to the UK may therefore harm our ability to build new homes. There are also indications of a potential impact on finance; a KPMG poll of 25 real estate investors with assets under management of over $400bn suggested that two thirds of them believe that a Brexit would result in less inward investment into UK property.
What about the impact on the rental market? In the short-term at least, this is likely to be minimal. The Report suggests that there even may be a slight increase in demand as EU nationals decide to relocate whilst they still can during the transitional period. The long-term effect, however, is likely to be more severe. European nationals are far more likely to be renters than homeowners, so if fewer migrate to the UK there is likely to be an impact on prices. However, if the reduction is to such an extent as to prevent landlords recouping their costs, this may lead to an exodus from the market which will, in turn, push prices back up.