Will Brexit bring UK property doom or years of future boom?
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Brexit doom, by Ed Mead
Baby boomers — I’m one — have much to feel good about. An ever more connected world, a closer Europe and the realisation of your home as an investment. The combination has propelled London to new heights. Gone is the smoky, strike-ridden place of the 1970s and 1980s, replaced by the clean squeak of money and the smooth progress of those who’ve created it. London’s rise has attracted financiers, entrepreneurs, developers and more, who came to make money and have generated tax revenues in the process. The majority came from Europe.
As those already living here aged, they basked in the glow generated by the unprecedented uplift in the value of their homes. As the rest of the world clung on, fearing meltdown, smug Londoners watched as prices, contrary to the forecasts of doom-mongers in 2009, accelerated. Indeed, they moved so far so fast, and the wall of money seeking a safe haven grew so high, that the Conservative party, the dominant partner in the then coalition government, worried that it was being seen as selling London to foreigners.
Margaret Thatcher enacted “right to buy” legislation in 1980, focusing owners’ attention on the value of their homes and turning them into an asset class. The aftermath of the Lehman Brothers collapse in 2008 and the financial crisis propelled London property into an asset class of its own.
At a time when wealth creation morphed into wealth preservation, what better way to protect your wealth than to own a piece of the most glamorous city on one of the world’s safest islands?
Indeed, what other investment could you live in if the balloon went up in your country of origin? Today, the ability for those with a home in London to travel easily to anywhere in Europe is the icing on the cake. The fact global companies choose to have their European headquarters in the UK capital simply adds to the feeling of security.
As tax breaks disappear and central London becomes ever more of a ghost town, quality of life, as opposed to capital appreciation or rental yield, will become an important driver, especially when growth has plateaued or reversed, as it is doing right now. I remember an age when sterling was a world currency and world leaders listened to us. But the world, and our place in it, has changed, and somehow revisiting the past, like buying your parents’ house, doesn’t seem such a good idea.
So, for many of us, the debate ends up as heart versus head. The EU has been good for London property; healthy investment since 2009 has driven up values and created a cosmopolitan feel. Large-scale inward investment has been commonplace since the Iranian revolution in the late 1970s. In those days, anyone making money worldwide wanted a second home in London, and that is still true. The problem with such long-term investment — according to our proprietary data going back to 1858 — is that overseas buyers differ from domestic ones insofar as their “itch cycle” (the length of time they own a property) tends to be a generation as opposed to a few years, so London’s wealthy diaspora has brought with it huge demand and ever shortening supply — a recipe for fast-rising prices. None of this has been helped by housebuilders preferring substantial profits by soliciting such buyers with seemingly little impediment from local or central government.
The numbers have reached such a pitch that well-off Britons who used to live in Kensington, say, have generated huge short-term price rises in abutting “emerging prime” areas. The hyperbolic headlines created by these rises have led, counter-intuitively, to a prolonged period of siege from a Tory chancellor.
In my time there has never been such uncertainty for property owners, with a general election, Scottish referendum and two years of negative focus in Autumn Statements and Budgets, the corollary of which has been swingeing property taxes. An exit from the EU would simply extend that period of crippling uncertainty — I’m talking transactions here, not prices.
Brexit brings with it two scenarios, neither good for property. The first is that overseas buyers — particularly as recent property tax changes offer little short-term advantage — will see the market, and yields, falling and decide they would have more fun living in other European cities. Wealth preservation and lack of investment growth seem destined to be with us as long as interest rates stay low — for the foreseeable future, then. Not only will new buyers be put off but many who have invested over many years in London may see a slide in sterling as a precursor to taking profits on property investments and exiting. It is easy to dismiss this wealthy elite but the kudos and money they have brought to London cannot be overestimated. Once that lustre leaves our capital it could take decades to reinstate it.
The second scenario is that, if we leave, sterling collapses to the extent that the only mechanism to protect it is to raise interest rates. Clearly, after so long in the current environment and with little warning, the effect would be dramatic. Anyone old enough to remember the 1992 post-exchange rate mechanism chaos will attest to that.
I will vote with my head: stay in, even though my heart says go. I suspect many will do the same, especially other baby boomers. Brexit chaos would threaten their life’s work — namely, the value of their home. Most tellingly, if an In vote is confirmed, the bounce in markets could make up for all the instability and pain of the past two years. David Cameron, the UK prime minister, simply can’t be that clever, and if he has been gambling, it’s been a high-stakes game.
Ed Mead is executive director of Douglas & Gordon estate agents
Brexit boom, by Paul Smith
Are we all doomed in the event of Brexit? Despite the government’s gloomy rhetoric, I suspect most people’s instinct — whether they are voting in or out — is “probably not”. We need to be more confident about the benefits of independence for our economy and, by proxy, our housing market.
George Osborne, the UK chancellor, has gone to great lengths to scare Middle England into believing that the price of their homes is under threat. However, the warnings are misleading. The Treasury is predicting house prices will fall by 10 to 18 per cent by 2018 in the event of Brexit, but this would be a fall on the Office for Budget Responsibility prediction of a 10 per cent rise in prices by that point. So the net figure is either flat growth or, in the worst possible scenario, an 8 per cent drop in today’s prices. And I’m not convinced the numbers are anywhere near accurate, or that a drop in average house prices is even likely.
The Treasury’s figures are also based on the assumption that, in the event of a vote to leave the EU, “demand for housing would fall due to the high cost of lending”. It is not clear, however, that there will be a rise in the cost of lending or borrowing. Even the Bank of England has said interest rates could go up or down. There have also been times in recent years where house prices have continued to rise even when banks have not been lending, as in 2010 after the economy had started to recover.
The truth is, we do not know what the cost of borrowing will be if we leave the EU. What we do know, however, is that the EU is already restricting access to borrowing, through the EU Mortgage Credit Directive. Introduced earlier this year, the measure makes it more difficult for homeowners to remortgage, and is just one of countless examples where the EU interferes in UK markets at the expense of British consumers.
The underlying strength of the UK property market is sound and highly profitable. The average house price has more than tripled since 1995, driven by domestic demand. Britain is obsessed by property, and people are more determined than ever to move on to and up the ladder. As many as 80 per cent of young renters want to buy a house and our data show last month there were still 10 buyers chasing every property on the UK market.
We have seen only a flutter of uncertainty in the housing market as a result of the referendum. House prices in the UK have continued to rise in the past month by just under 1 per cent, according to Haart data. If people were anticipating a big drop in prices over the summer, we would have seen a significant fall by now. It is true that if we vote to leave the EU, the uncertainty could continue for a short period while the government renegotiates its new relationship with Europe. This could perhaps last for a few months, after which the market will become familiar with the timetable for renegotiation.
Be we need to look at the bigger picture. Britain will prosper from its newfound autonomy, with better prospects for international trade and a cut in the red tape holding back small businesses. We will see the housing market and housebuilding rise, too, because when the economy does well, so does the housing market. We saw that most recently in 2007 when housebuilding peaked, but it was also the case in 1963 and 1968 — both, incidentally, before we entered the European Economic Community.
We must also recognise that we have a growing population — EU or no EU. British buyers are going to need new homes whichever way the vote goes and, despite the recent boom in housebuilding, we still have a housing shortage. That imbalance between supply and demand is unlikely to change. Property will be a good investment for years to come. That was the case before we entered the EU and will continue to be long after we leave.
If you cast your mind back, there was a cosy economic consensus around the need for Britain to join the euro, and before that for our membership of the exchange rate mechanism. There were as many economists predicting economic disaster then as there are now, but the decision to refuse the euro and to drop the ERM were two of the best economic policy decisions UK governments ever made. Pulling out of the ERM led to a short-term fall in the pound, but the long-term benefits of an independent monetary policy have seen the pound soar and UK business thrive. The housing market has benefited from all of this.
The reality, of course, is that prices go up and down, and always have. The referendum may have a short-term negative impact on house prices, but we are already nearing the limit and we will have to deal with the affordability problem sooner or later.
So Britain should be confident. We are an economic powerhouse driven by the skills, talents and ingenuity of our population, and we are attractive as a place to invest in or out of the EU. Of all of the UK’s sectors, the housing market is one of the strongest and it stands to gain from the freedoms and independence that will come from Brexit. Expect to see those talking down the economy now to quickly change their view if they don’t get their way on Thursday.
Paul Smith is chief executive of estate agents Haart
Illustrations by James Fryer
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