London House Prices will Probably Continue to Fall
On Thursday, June 23, the people of the UK voted to leave the European Union, throwing the global economy into upheaval. Since deciding to leave the EU, there are a lot of questions and ambiguity surrounding the Brexit vote and how it will affect visas, immigration, business, economy, pensions and of course – the traditionally strong property market.
The Brexit vote started a 2-year deadline in which the negotiations with the EU will determine how the relationship between the UK and EU will operate going forward. Although the full effect of the decision won’t be felt for years, the immediate consequences have been felt economically.
The UK has now lost it’s AAA credit rating, the pound has recently dropped to its lowest level in decades and UK stocks have had their lowest drop since the 2008 economic crisis. This has caused innate uncertainty and concerns for many people who have invested in the UK economy. Some experts have speculated that the Brexit vote could push an economic recession in the UK of up to a 40% decline in the average UK house price. If there is a recession it will most likely be caused by political uncertainty, a decrease in investments and cuts across the broad. The predicted long period of weakness for the British pound and inflation would subsequently decrease consumer spending. As consumer spending halts and international intrigue declines and new immigration policies restrict the movement of labor into the UK, the property market could decline between 30-40% and even 50% in London. A recession would also cause major companies to go bust and major job losses throughout the UK, this in turn causes homeowners to face repossession and property’s being dumped onto the market at low prices due to people requiring a quick a sale. Ironically with the last recession that was essentially caused by poor practice from the banks, they would repossess properties and sell them through an auction when infact it could have been a better route to sell to a Internet House Buyer, we compare the two methods of selling here.
Brexit and the London Property Market
London is notorious for it’s expensive homes and unattainable properties for average-income households. During the 2008 economic crisis, London property prices fell by more than 20%, but the recovery has been miraculous. The cities property values have risen by 75% since the crisis, creating a housing bubble that could not be sustained. The prices of London properties are expected to continue to fall and this might be seen as a correction to a housing bubble around the property market.
Properties in London cost the average-income household more than 40% of annual salary in mortgage payments. This has created a housing bubble for individuals and families that seek a property in the capital, but Brexit might be the fix that they are looking for. Sellers promptly lowered property prices to unload some of their property following Brexit. Properties around London are already 10-15% below the price they were 1-week before the vote. Properties in the expensive areas around London such as Chelsea have cut their asking prices by 8-10%.
However, buyers aren’t as quick to purchase property as anticipated. Buyers are insisting on lower prices than market-value to protect themselves against declining prices and inflation. It’s not just uncertainty creating the decline in property value either. As London companies and internationals are forced out of the UK to remain in the EU single-market, many home-owners as well as commercial property could resell their homes in some of London’s most expensive boroughs.
House sales are expected to drop more than 25% over the summer months, hopefully correcting the house bubble. However, if the sterling continues to fall, it would not be wise to purchase a property, as assets will continue to lose value.
London Property’s Were Declining Before Brexit
The inner London markets have been experiencing declining prices since their height in November 2015. The property taxes on the highly-priced properties had already started to hamper interest in them and this was even before before the uncertainty of the Brexit referendum caused a further slowdown.
Average prices around Inner London have dropped in the seven cheapest boroughs and nationwide house prices have dropped almost 1%. Although some of these price drops can be attributed to the uncertainty of what will come from the sterling and UK economy, prices were expected to drop this quarter for a multitude of reasons:
- Fast-paced construction growth
- Stricter mortgage lending criteria
- A buy-to-let rush that has contributed to the falling house prices
- In addition we have the annual summer property-market slowdown.
Property experts have suggested that the price reduction is not necessarily a fall or a downturn but rather a natural correction to the property bubble.
How the UK Commercial Market Looks After Brexit
The Brexit vote has had the most dramatic consequences on the UK Commercial Property market – a market that had already been experiencing steady declines.
In the second quarter of 2016, commercial investors spent almost £10bn, a 45% decline from the previous year at the same time and inquiries dropped by 9%. After Brexit, the affects were felt almost immediately. Seven major commercial property deals fell through and 7 property funds worth more than £15bn of investor cash suspended withdrawals after the investments were expected to lose more than 15% of their value in days after the vote.
One of the property funds reopened 2 weeks after the vote. There has been an overall discount on property values of up to 26% and for investors that want to opt out of the investment, they will have to pay a 17% premium. However, it is suggested that the fundamentals of the commercial property market investments are strong and are prepared for the highs and lows of the inherently unstable market.
Reports have suggested that more than £600m in commercial property contracts have been abandoned and billions have pounds have left the commercial market. Although this might not seem substantial to residential property owners, the notion of businesses and developers deciding to leave London can have a domino effect on the economy and property market going forward.
Nevertheless, much like the residential market, property experts insinuate that commercial property was tremendously overvalued, advocating that a correction was necessary to prevent a property bubble from having long-lasting effects on the property market.
Post Vote Leave, there are a lot of questions, people are anxious and spectators are eager to make their predictions. Perhaps the returning theme of Brexit is that things are bad – but they aren’t as bad as they could have been – they aren’t as bad as we expected.