By Ashley Osborne | Head of UK Residential & Managing Director – International Properties
As 2016 is drawing to a close, we look at economic and political developments from the year which will affect the London residential property market in 2017.
Preparing for Brexit
The uncertainty caused by the UK’s decision to leave the EU will most likely be felt more so in 2017 than any other year, as Theresa May triggers Article 50 and negotiations on the terms of the UK’s Brexit commence but are yet to be determined. Many economists prior to the referendum had been predicting an immediate and significant impact on the UK economy should the country vote to leave the EU, but so far these predictions have not come to pass. While turbulence is expected, post-Brexit surveys suggest that the economic slowdown will not be as harsh as many had feared and the recession that the IMF warned would happen, looks highly unlikely.
So far since the vote, London’s housing market (much like the economy) has been relatively unharmed. We have seen encouraging signs with prices having risen since June and enquiries and mortgage approvals all on the increase. The attitude so far across the country has been ‘business as usual’ and assuming Brexit negotiations are not too detrimental we would expect this attitude to continue into 2017.
In short supply
In the first three quarters of 2016, London housing starts fell to their lowest level since mid-2012. This was driven by falling activity in the capital, fears of an oversupply of luxury homes particularly in the central boroughs, and largest of all –uncertainties surrounding Brexit.
In his first Autumn Statement, the Chancellor said the government would launch the biggest affordable house building program seen since the 1970s. Coupled with a continuation of government backed schemes such as Help to Buy and potential further initiatives aimed at assisting first time buyers, along with freeing up more public land for development, and on the surface it would seem that there are many encouraging measures being taken to rebalance the fundamental lack of supply faced by London’s housing market. The reality however, is that housebuilders will only build if it makes economic sense for them to do so, and they will naturally be more cautious in a year beset with uncertainty due to early stages of Brexit negotiations. In addition there is the threat that newly available public land may be developed instead of, not in addition to, private land, thus eroding this benefit. Ultimately even if these measures do work, the lack of supply is so acute, that it will be many years before the effects are seen. In 2017 at the best we can hope is that these measures will offset the decline in housebuilding we would have seen as a result of Brexit if these government initiatives were not introduced.
How low can it go
So far the biggest impact of Brexit on the UK has been its effect on the pound with sterling suffering against the Euro and US dollar since the referendum vote in June (it is currently trading close to a 31 year low against the greenback). The result of this is that many international London property investors, especially those in Asia, are looking to London as the number one residential investment market globally due to automatic discounts offered by a weak currency, and an economy which has on the whole remained unscathed by the impending departure of the UK from the EU. The currency’s continuing weakness has been accentuated by the cut in interest rates from 0.5% to 0.25% in August, and the Bank of England’s economic stimulus measures.
The pound has been one of the worst performing currencies globally in 2016 but it is likely to stabilize and strengthen in 2017 for a number of reasons:
- Currency markets largely overreacted to the outcome of Brexit, this was not seen in stock or property markets, and was to some degree a superficial result which should result in the pound rallying at the start of 2017
- Many analysts now believe the pound is undervalued
- UK assets and bonds now look very attractive to international markets which will further support the currency
While it is hard to say what is next for the pound, many believe the currency has seen its largest falls to date, although with the triggering of Article 50 next year there may be slightly further to fall before a rebound after this point. Upsets across the Eurozone and rumbles of potential in or out referendums in Denmark, France, Italy, the Netherlands, and Sweden, as well as the introduction of potentially inward looking policies from the Trump presidency in the US, mean that sterling could see growth against the Euro and USD. In addition the UK Chancellor announced increased spending in high value investments such as innovation and infrastructure in the recent Autumn Statement, the knock on effect of this is expected to have a positive impact on the value of sterling.
So what does this mean for house prices in 2017
Putting threats associated with Brexit to the side for a minute – one of the first things we need to consider when it comes to London house prices is the basic principle of demand and supply economics. The London residential market is underpinned by a significant lack of supply as outlined above, and ever increasing demand due to a growing population and now even more interest from overseas investors. In reality Brexit is likely to mean most developers are likely to keep new development build starts to a minimum in 2017 as they assess the impact of Brexit negotiations on the economy – this will further constrain supply which is likely to put more upward pressure on pricing for the next year as existing demand is not satisfied thus propping up prices.
In addition, given the current low cost of debt and prevalence of mortgage lending, along with government initiatives which assist home buyers, it would seem that there will be little by way of economic policy to hinder demand in the immediate future. That being said, if anything is certain it is that 2017 will be a year of uncertainty and this will go some way to diminish buyer numbers slightly. There will also be less urgency for buyers to pay over the odds, as in these subdued conditions people are less likely to take on risk.
All things considered therefore, 2017 is unlikely to be a year for great gains in London house prices and we would expect modest growth if anything. This however should not be an off putting prospect for buyers and investors in the coming year. In the past 35 years in a period that included three recessions – in the early 80s, early 90s and the global financial crisis in 2008 – London house prices have grown by an average of 6%- 8% per annum on the whole. Moderate price growth is not a bad thing for any potential London buyer, especially in a market where the winners are nearly always those purchasing for the long term, rather than those looking to a make a quick buck.