If the UK is heading for a ‘hard Brexit’ what could it mean for housing markets?

If the UK is heading for a ‘hard Brexit’ what could it mean for housing markets?

Politicians flex their Brexit muscles at Tory party conference

On 2nd October at the Conservative Party Conference, Prime Minister Theresa May announced that Article 50 would be triggered by the end of March 2017, starting the clock on negotiations for the UK to leave the EU within two years. While this was not an unexpected move and the clarity that this brings is to be welcomed, the tone of the announcement and subsequent discussions over the course of the week sent further shockwaves through the UK financial markets.

For the first time, the likelihood of the UK negotiating a ‘hard Brexit’ became a real possibility, unsettling businesses and investors. In Theresa May’s opening speech to the Conference she said:

“We are going to be a fully-independent, sovereign country, a country that is no longer part of a political union with supranational institutions that can override national parliaments and courts. And that means we are going, once more, to have the freedom to make our own decisions on a whole host of different matters, from how we label our food to the way in which we choose to control immigration…

…Let me be clear. We are not leaving the European Union only to give up control of immigration again. And we are not leaving only to return to the jurisdiction of the European Court of Justice.”

Chancellor Philip Hammond also addressed the Conference, warning about UK economic turbulence in the months ahead as Brexit negotiations progress. Financial markets interpreted the speeches as an indication that negotiations will favour a ‘hard Brexit’ stance and the pound immediately fell against the US dollar and Euro. Meanwhile, the trigger for the “flash crash” on Friday 7th October, where the value of Sterling dropped by more than 6% against the US dollar, is under investigation by the Bank of England. While human error could be to blame, what is clear is that Brexit uncertainty, and the prospect of a ‘hard Brexit’ has greatly unsettled the UK financial markets. Despite regaining some value against the dollar after the initial dip, the pound still ended the week down 4% on a week earlier. This is its worst weekly performance since the week of the referendum. Furthermore, the pound has continued to slip and by 10th October was 16% down against the US dollar and 15% down against the Euro compared to its position on the day of the referendum, a new 31 year low.

Meanwhile, the FTSE 100 reached almost record highs on 11th October since many of the companies in the index operate overseas and benefit from the fall of Sterling. The FTSE 250, which is more representative of the UK economy, has not recorded such gains. In fact, since the fallout from the Tory Conference, the FTSE 250 has fallen by 2%.

What could hard Brexit mean for key sectors of the economy?

In the last week, a number of commentators have spoken out on the risks of a ‘hard Brexit’. The UK’s financial sector, which employs 1.1 million people across the country of which around a third are in London, is likely to suffer job losses in the relatively short term. The future competitiveness of other industry sectors will depend on the balance of exchange rates and tariffs. Right now a weak pound is working in favour of exporters but if the UK steps outside the single market, trade tariffs could escalate and that will create enormous uncertainty for some years.

A report by consultants, Oliver Wyman, commissioned by TheCityUK, estimates that a hard exit from the EU would result in the loss of 31-35,000 jobs in directly EU-related activities and a knock-on of a further 34-40,000 job losses in associated activities – a potential 76,000 high skilled service sector jobs – the kind of jobs that have craven the UK’s economic growth. It would result in a loss of up to £38 billion of annual revenue and £10 billion per annum in tax revenue. On the other hand, a softer exit in which the UK retains passporting and access to the Single Market on existing terms, would leave the sector relatively unscathed with the loss of only around 3-4,000 jobs and £2 billion of annual revenue with an associated £0.5 billion of tax revenues.

Meanwhile, leaked Treasury papers have warned that a ‘hard Brexit’, with the UK leaving the single market, could cost the whole economy up to £66 billion a year in lost tax revenues.

So how is the property sector faring post-Brexit?

In the immediate aftermath of the referendum, the average share price of the UKs largest housebuilders dropped significantly but since then, the sector had begun to regain some of the losses. By 4th October, the average house builder share price was 40% higher than in the trough in the days following the Brexit vote and was only 14% below the pre-referendum high. During the Conservative Conference, Chancellor Philip Hammond and Communities Secretary Sajid Javid announced a number of measures to support the level of housebuilding across the country. A £3 billion Home Building Fund is intended to speed up the delivery of new homes, while a further £2 billion was announced to accelerate construction on public land. Despite these announcements, housebuilder share prices fell once more in the following week, clearly demonstrating the burden of Brexit uncertainty on the sector. Since 4th October, average housebuilder share prices have fallen by 8%. Institutional PRS investors should take some comfort however as they look to be in line for support.

The promised expenditure on infrastructure has the potential to boost housing markets that benefit and blight those that lie in the way.

There is no doubt that the weak pound has stimulated some investor-motivated activity in prime London but transaction volumes are low, still reeling from the additional stamp duty on second homes implemented in March. Meanwhile, at a national level, prices have continued to rise in the wake of the vote with average sales prices now 8.3% higher than a year ago. Agents have become more confident, anticipating stable levels of demand for properties going forward which would support some price growth and may help transaction volumes to increase.

 

What to look out for in the coming weeks

Positive news on the state of the economy in the last few weeks have been reassuring but these are too early to reflect the real impact of Brexit and the reactions of the markets underlines that we are not out of the woods yet. Perhaps we have just been enjoying the calm before the storm. A certain amount of volatility is to be expected over coming months and even years. It is important that the markets are reassured of a clear strategy for the Brexit negotiations. In the short term, all eyes will be on Philip Hammond on 23rd November when he reads his Autumn Statement to Parliament. How does he plan to steer the UK through these turbulent times?

Key Brexit market indicators

10-dataloft-inform-guest-chart

Source: Dataloft, Bank of England, FTSE250, various housebuilders (Index Referendum day = 100)