The topic of house prices is never far from most property investors’ minds but, this month, it has been drawing particular attention.
Firstly, it has become something of a political hot potato. On 8th May, George Osborne used it to support the argument that Britain should remain within the European Union. With the ‘Brexit’ referendum only a matter of weeks away, the Chancellor took the opportunity of a BBC interview with Robert Peston to claim that if Britain were to leave, then average house prices could fall.
In a wide-ranging discussion, he didn’t spell out the precise mechanism by which this would happen at a nationwide level but said that Treasury staff were working to quantify just how much of a hit typical homeowners could expect. However, addressing the specific question of London house prices, he said that values were driven to a large extent by foreign buyers and that if a ‘leave’ vote were to cause such investors to abandon the market, then average values could fall.
For home buyers, the prospects of falling house prices might sound like good news – especially in the highly priced capital. However, the Chancellor went on to warn that a departure from Europe might also send interest rates rising, thereby making properties more expensive for buyers of all kinds.
Critics, of course, will shrug off such assertions, labelling them no more than political scaremongering, but what certainly seems true is that the property market will remain subdued until after the EU Referendum. As we noted in a previous article, even expert economists are divided on the likely implications of Brexit so most property investors and would-be buyers are awaiting more certain conditions before committing to a purchase.
Looking at average prices across the UK, one might regard such caution as well justified. On the 9th May, for example, The Telegraph quoted an announcement by Zoopla, noting that “29 percent of homes currently listed for sale have cut their asking prices at least once since the property was first listed.” This, said the paper, might be “a sign that the feverish property market is finally starting to cool down.”
Unsurprisingly, some of the biggest reductions have been seen in affluent markets such as Kensington and Chelsea, where average reductions amount to a staggering £179,593. However, Zoopla’s figures also show asking price reductions in other areas, from as far north as Hartlepool, all the way down to Paignton on the south coast. It’s a scattered picture that once again underlines the message that the British housing market should never be viewed as a single entity.
Part of the current slowdown in the market must surely be put down to pre-referendum jitters. Such an effect was widely predicted and comes as no surprise. However, another factor must also be the Chancellor’s Stamp Duty hike in April this year. This sent many investors scurrying to complete their transactions ahead of the deadline and prompted a marked surge in both sales and prices. According to HMRC, a record-breaking 165,400 British properties were sold in March. Now, in May, we are seeing the inevitable lull and, with that short term ‘heat’ removed from the market, we may expect a return to more stable conditions.
A key message to come out of all this is to be aware of how erratic the market can appear when measured by monthly statistics. Short term fluctuations can make for eye-catching headlines but the reality is that serious property investors regard bricks and mortar as a much longer term proposition. Month-on-month, for example, figures from the Halifax show that average values actually fell by 0.8% in April – the month in which George Osborne introduced the extra 3% duty on second properties – but if we compare the year-on-year figures, then average house price growth still stands at an impressive 9.2%.
Fundamentally, the residential property market is built on strong foundations. Demand is high, supply is low and long term forecasts all seem to agree that prices will keep on rising. Discussing the market turbulence associated with Brexit, Dr Howard Archer, chief economist at IHS Economics, said that uncertainty would probably see the housing market slowing over the next few weeks. However, he added: “Nevertheless, we expect housing market activity to regain limited momentum in the second half of 2016 on the assumption that a vote to stay in the EU reduces uncertainty and supports a pick-up in economic activity.”
Between now and the June referendum, it’s probably safe to predict that the number of property purchases will fall, simply because few investors enjoy uncertainty. That said, there are a small number of professional investors who regard the coming weeks as an opportunity: if prices do indeed slow in the run-up to June 23rd, then there may be some comparative bargains to be had. Looking beyond that, then whatever the outcome of the Referendum, some of the associated uncertainty will vanish and investors may once again find their confidence returning. As a result, prices should begin to rise again and the early buyers could see their bargain acquisitions gaining quickly in value. It certainly isn’t a strategy that would suit everyone but it does illustrate the need to look beyond the headlines.
Interviewed by The Telegraph on 9th May, Samuel Tombs, an economist at Pantheon Macroeconomics said that he expected price growth to remain strong, arguing that house-building rates had stalled once again, and that the cost of borrowing was still exceptionally low. He said he had confidence in the latest RICS forecast, which predicts a 2% rise in house prices during the second quarter of 2016. He said: “Brexit fears might subdue prime London property prices, but previous bouts of political uncertainty have seldom depressed the whole market. As such, we expect price growth to remain strong.”