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Easier monetary policy could weaken Brexit effect on UK real estate
The hit to UK real estate sentiment that many experts predict will be sparked by the vote to leave the European Union may be limited by easier monetary policy, it is claimed. While uncertainty in the run up to the referendum had little effect on domestic real estate pricing this year, investment activity slowed but an analysis report suggests that this hasn’t been exclusively caused by Brexit fears but largely reflects greater investor caution as the market reaches the top of the cycle. However, according to Chris Unwin, head of global research at Aviva Investors, the vote to leave suggests there is now little hope of any bounce in sentiment. ‘Indeed, it may be many years until we have clarity on the UK’s constitutional arrangements and trading agreements,’ he said. He pointed out that the financial markets’ reaction to the vote was swift and dramatic with Sterling falling to its lowest against the US dollar in over 30 years and 10 year gilt yields reaching a record low. And, as equities plunged, real estate shares were particularly badly hit. He believes that mounting fears of an economic shock and in the short term, uncertainty as to the UK’s constitutional arrangements and trading agreements, will dampen activity and may trigger a recession by the end of 2016. In the longer term, the economy is likely to be impaired by reduced access to European markets and poorer demographics, weakening the UK’s fiscal position and potentially damaging productivity growth. On top of this calls for a second referendum on an independent Scotland will grow and great further uncertainty. ‘Domestic capital values now look likely to decline moderately over the remainder of the year. It is worth noting, however, that some commentators believe Brexit will hit real estate returns, and the economy, more severely. By contrast, we had expected to see a slight increase in capital values over coming months had the UK voted for the status quo,’ explained Unwin. He expects to see prolonged illiquidity in real estate markets pending renegotiation of international agreements and transaction activity to be low while heightened risk aversion will reflect lower growth expectations and political risk. ‘To compensate, some widening in yields is probable. Secondary assets are likely to be hit even more,’ he added. However, Sterling depreciation could support demand from overseas investors but Unwin pointed out that this needs to be balanced against the UK real estate market’s diminished ‘safe haven’ status along with additional caution in Scotland resulting from pressure for a further independence referendum. Unwin thinks UK occupier markets could be affected significantly less than investment markets. ‘In the short term, a rapid deterioration in the labour market is not expected. Demand for space is not set to fall rapidly,’ he said. ‘If the weakness of sterling is maintained, UK retailers could be hit, particularly those operating on low margins. On the other hand, it may boost prospects for markets dependent on tourist spending, like prime central… Continue reading
UK regional cities see prices surge, led by Liverpool and Bristol
Regional cities in the UK, led by Liverpool and Bristol, have seen house prices surge, helped by rising number of investor buyers, the latest cities index shows. The 20 city index from Hometrack shows that overall prices have increased by 4.4% quarter on quarter and 11.2% year on year, taking the average price to £237,500. Liverpool has seen the highest growth in the last quarter and Bristol has the fastest annual growth rate. Prices in Liverpool were up 5.4% quarter on quarter and 6.5% year on year while in Bristol they increased 4.2% quarter on quarter and 14.1% year on year. London has also seen strong year on year growth with an annual rise of 13.8% with quarter on quarter growth of 3.7%. Cambridge and Southampton also recorded large annual rises at 13.4% and 10.3% respectively. Quarter on quarter the prices growth has been led by Edinburgh, Belfast and Aberdeen with a rise of 19%, 16% and 12% respectively while Aberdeen, which has been affected by the fall in oil prices is the only city in the index to have seen prices fall, down 4% quarter on quarter and 9.6% year on year. But there is likely to be some affect from the referendum result that the UK should leave the European Union and the Hometrack index report says that it will impact turnover far more than house prices in near term although it predicts a rapid deceleration of house price growth across all cities in the second half of 2016. ‘The city level impact is hard to gauge but we expect the immediate impact to be felt in London where affordability levels are stretched and the market was already facing headwinds,’ it explained. Overall, the report says that price inflation continued to increase in May, building on a strong first quarter and the surge of investor demand ahead of the stamp duty change for additional homes that came into force in April. Year on year growth is running at 11.2% compared to 6.2% twelve months ago. ‘The immediate and short term impact of the EU referendum result will be widespread uncertainty amongst buyers and sellers across the housing market. This is against a backdrop of already subdued turnover. While sales volumes have recovered from their 2009 lows, sales as a percentage of stock remain low by historic standards at around 5%, or a move every 20 years,’ the index report points out. However, Hometrack does not expect house price falls as the greatest impact will be on market activity. ‘House price falls would require forced sellers, driven by higher mortgage rates and/or rising unemployment. While short term turmoil in financial markets will impact market sentiment, it is too early to say how the vote to leave will impact the real economy,’ the report explains. It adds that tighter lending criteria implemented in recent years will help to mitigate the impact on the more recent entrants to the market and levels of new housing… Continue reading
Residential mortgages unlikely to be affected in short term by Brexit vote
Home mortgages in the UK are unlikely to be affected immediately by the decision to leave the European Union, according to finance commentators. However, it could be good news for first time buyers if price growth slows and interest rates fall with some experts predicting that the Bank of England might reduce rates even further than the current historic 0.5%. In the short term, people’s attention will be on interest rates and what impact this will have on mortgage costs, according to the Council of Mortgage Lenders. ‘While markets are bound to react to the news, the question will be how long it takes for them to settle. We know the authorities will be mindful of this,’ said the CML spokesman. In the medium term, there will also be interest in the extent to which housing transactions are affected by economic uncertainty, and whether this will impact on house prices. The more quickly markets resettle, the lower the impact on the housing market is likely to be. However, any prolonged disturbance would inevitably impact the housing market. ‘For lenders, the treatment of customers and of mortgage applications will be business as usual. People who have received mortgage offers will not see them affected. People facing financial difficulty will continue to be treated constructively and positively,’ the CML spokesman explained. ‘Lenders remain open for business as usual. Mortgage pricing is unlikely to react instantly, although pricing may be affected in the foreseeable future because of the effect on lenders’ cost of funds arising from the perception of economic uncertainty. How long this lasts will depend on how quickly markets resettle,’ he added. Indeed, Mark Carney, governor of the Bank of England, quickly announced that any measures needed to support financial markets and the UK economy would come into play. These measures could include a cut in interest rates that could reduce home owners' monthly mortgage payments, a measure repeatedly taken during the financial crisis of 2008. James Roberts, chief economist at real estate firm Knight Frank, believes that an interest rate cut is on the cards. ‘We expect the Bank of England, seasoned by the experience of financial crisis, to respond quickly. An interest rate cut of 25 basis points is a strong possibility at the Monetary Policy Committee's July meeting, or perhaps earlier if required,’ he said. Continue reading
