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At this early stage, forecasts about the likely performance of the residential property market in 2017 that were made towards the end of last year remain unchanged. But there have been some attempts to explain why the fall in house prices that many predicted would follow a Brexit has not as yet materialised.
On the positive side, a month before the referendum the investment analysts Moody’s released a report saying Brexit would be a huge boost for first-time buyers, putting previously unaffordable properties in reach, especially in London. Meanwhile, many more warned that a vote to leave Europe would crash the property market. The then Chancellor George Osborne predicted it would experience a “severe shock”, the International Monetary Fund a “sharp drop”, and the Treasury a 20% fall over two years.
More than six months on, little has changed. The house price index has actually increased slightly, and the Office of Budget Responsibility now predicts that Brexit will eventually push house prices even higher. Savills says house prices will stay flat, while Royal Institution of Chartered Surveyors (RICS), Nationwide, Hometrack and Rightmove all predict small rises of between 2% and 4%.
Simon Rubinsohn, Chief Economist at RICS, has said that the impact of increasing stamp duty for second homes, in April 2016, “has been a much bigger factor in the profiles of activity over the year than the referendum.”
So why hasn’t Brexit caused house prices to drop? Martha Gill, political reporter from the Huffington Post suggests four main reasons:
If the uncertainty of Brexit has made buyers cautious, it has done the same for sellers. For several months there have been falls in the number of houses coming on to the market, which keeps prices up.
Unemployment rates and wage growth remain steady, for now. As the economy holds up, so does the number of people willing to take out new mortgages.
Interest rates were slashed after the referendum, and borrowers found themselves with better conditions. The pound also weakened, which may have helped keep foreign investment.
But the main reason house prices haven’t slumped is that there’s a shortage of them. House building has long been neglected in the UK, and although it has recently picked up a bit, it has a long way to go before catching up with the expanding population. With the major property services and investment firm JLL suggests that the number of housing starts could fall in 2017, there are fears that Brexit could actually make the problem worse, as construction firms face increased costs and uncertainty.
The falling value of the pound – down around 10% against the Euro and 17% against the US dollar since June 23rd – also creates opportunities for international investors, or foreign nationals, who can now snap up UK properties with what amounts to a substantial discount on their pre-Brexit prices.
The building industry puts its prices up in January and this year there are indications that prices for building materials will rise more than usual, because of the fall in the value of the pound and a shortage of some products, as a consequence of increased demand from developing economies, such as China and India.
Peter Gibson, director of the Macclesfield branch of MKM, the UK’s largest independent builders’ merchant, said around 80% of the products they stock are produced domestically, but imported products, such as timber and sheet materials, have become more expensive since the Brexit vote. Giving the example of Spanish slate, he noted that it has become about 15% more expensive, and builders may well choose to pass such costs on to their customers. Discussing the new year’s price increases, he said that cement and plaster board were up 6% and plaster was up 3.8%, all 1-2 percentage points higher than he would have expected from previous years. MKM sells 90% of its products to trade, and it is up to the builders how much of the price increase they pass on to end users.
The Federation of Master Builders (FMB), the industry body representing local builders and construction industry SMEs, surveyed more than 200 building firms, and asked about increasing prices. Their chief executive, Brian Berry, said that 65% of their members predicted rising costs in materials in 2017, with prices rising by as much as 22%, and some members saying that they could go up by as much as 30% this year, which he characterised as substantial increases in the costs of raw materials. Meanwhile, he said that another survey, freshly released, showed that materials costs were at their highest level in five and a half years. There are shortages of timber, Spanish slate, and zinc, so the effects are widespread across the full range of materials that are needed for builders.
The FMB carries out a quarterly survey of its members, which show that although the rising cost of materials has been an issue of concern for some years, the fall in the value of the pound has exacerbated the problem.
This is bad news for large builders, but worse for SME, who are likely to experience cashflow problems, and that will increase both the cost and the difficulty of producing new homes in a time when there is a recognised housing crisis and the government is trying to encourage first time buyers to buy new-build homes. According to Robert Gardner, Nationwide’s Chief Economist, the number of homes on the market is now “close to all-time lows”. The average rate of building is 12% lower than it was before the financial crisis, and 37% below what it should be to keep up with increases in the population.