The shock UK referendum result caught financial markets by surprise and seems to be having at least a short-term impact upon UK property prices. A number of estate agents have stepped forward to confirm that some buyers are putting their purchases on hold while others are taking a step back while the situation unfolds. Feelings are still extremely raw in the UK in light of yesterday’s result with an oncoming battle with EU counterparts who seem determined to push the UK out of the European Union as quickly as possible.
Buyers take a step back
Continuing a trend which began some months ago property buyers in the UK are taking a step back as the expected fight between the UK/EU begins to turn ugly. Yesterday David Cameron resigned suggesting that article 50, the formal process of leaving the European Union, would not be enacted until a new prime minister was in place by October. However, the European Commission is already putting extreme pressure on the UK government to begin the negotiation process which would eventually see the UK leaving the European Union.
Interestingly, some property buyers are only putting their purchases on hold for the moment in the hope that prices will fall in the short term. Indeed, it is also worth noting that many property buyers are still going ahead with their intended transactions although there is some concern about the short to medium-term outlook for the UK economy. All in all, it looks like being a rocky few weeks and months for the UK property market.
Falling transaction numbers
While the UK Treasury suggested that house prices could fall by between 10% and 18% in the event of Brexit it is unclear whether these figures are accurate. History shows us that significant political and economic shocks do impact property transaction numbers with falls of up to 10% expected outside of London and 15% within the London property market. We all know that a reduction in transaction numbers reduces competition for properties which ultimately stifles property price rises or can lead to property price falls as sellers look to complete at discounted prices.
The reality is that it is difficult to blame property buyers for deciding to sit on the sidelines in light of the shock decision yesterday to leave the European Union. On the flip side of the coin, a reduction in the value of sterling on the exchange rates has attracted some foreign investors although any exchange rate benefits would need to be considered against potential economic risks. It will be interesting to see how these particular areas pan out in the forthcoming months especially when you bear in mind the significant recovery from early losses on the stock market and currency exchanges yesterday.
The greater short-term risk to the UK property market is a reduced appetite to conclude property transactions with some investors looking to re-enter negotiations at lower valuations. This makes perfect sense from an investment point of view because the greater uncertainty does have an impact upon the risk/reward ratio. The fact that the Bank of England is ready to pump up to £250 billion worth of liquidity into the money markets does offer something of a safety net, although we can only hope that increased tensions between the UK and the European Union do not impact exit negotiations when they finally begin.