Why Brexit may challenge the UK property market

Sarah Leissner of Credit Suisse explains why the post-Brexit road ahead may prove a challenging one for the UK property market

The UK housing market has been on an upward trajectory for several years, driven by solid economic growth and a very accommodative monetary policy. Across the board - nominal house prices are 36% higher compared to early 2009, and already exceed pre-recession levels. This holds particularly true for central London, where buyers are paying almost 90% more than they were seven years ago. Despite this value surge, property prices in the capital continued to increase at a rate of 12% year-on-year in the first quarter of 2016, comfortably outperforming other parts of the country. The average ratio between house prices and earnings clearly shows that London has decoupled from the rest of the country. While this ratio is above 10 in the country’s capital, property values in other parts of the country lie between 3 and 6.

The prime segment of London’s residential market has seen a similar evolution, although dynamics have slowed in more recent times. On a two-year basis, price levels have picked up by just 2.4% as of May 2016, and monthly changes have mostly been in negative territory since last autumn. Reasons for this include the introduction of several new regulatory measures, which have impacted on the upper segment of London’s property market making it even more expensive from a buyer's perspective. The stamp duty reform in December 2014 has increased transaction costs for properties worth more than GBP 1.125m. Furthermore, since April 2016, a 3% rise in stamp duty now applies when acquiring a second-home or buy-to-let property. Accordingly, transaction activity surged in March as buyers moved to complete their purchases ahead of this deadline.

The decision of the British population to leave the EU in the referendum on June 23^rd will undoubtedly have repercussions for the UK property market, although it’s hard to assess the full impact at this point in time. The ripple effect on the wider housing market ultimately depends on the consequences for the British economy. We have lowered our GDP forecast for both 2016 and 2017 but do not see negative growth in 2017 as others do. However uncertainty in the job market as well as the impact on future income growth will likely have a dampening effect on housing demand.

By contrast, ongoing low supply and possible further monetary easing or rate cuts by the Bank of England should provide a healthy counter balances. London’s prime segment has already seen dynamics slowing down, and the vote in favor of Brexit will generate a period of ongoing uncertainty. Historically high price levels and an increased tax burden pose further challenges, although some overseas buyers might be lured by a weaker pound. All in all, the British residential property market is entering into a phase of increased uncertainty and volatility, with prices likely to come under pressure. Clamoring for a reduction in house prices however isn’t a standpoint of conviction in our view.