In our previous discussion, we highlighted that a decline in the value of pound will likely be the first outcome from the result of the referendum. Since then, many are expecting and speculating a technical recession and a slowdown in investment as exporters and companies weather the repercussions from Brexit.
In terms of the housing market, while the impact of Brexit on the housing market would likely depend on the outcome of negotiations on the UK’s exit, we would expect it to impact the property sector in several ways. Firstly, consumer confidence and the uncertainty in the market would likely result in less discretionary purchases and an overall decline in transaction volumes and prices. The impact to pricing however would be offset by the continued structural undersupply of homes in the country, in particular in the most prime and connected areas in UK, setting a floor to the prices of homes.
Since mid-2014, we have seen slow growth in the prime London residential market with the EU referendum being one of the few headwinds to hit the market, apart from the UK election and cooling measures like higher stamp duty rates and additional rate for investors and second home buyers. Whilst Brexit would inevitably result in a period of uncertainty in the prime London residential market, we believe that there would be continued demand for prime London property and the impact of any redirection of investment to other alternative markets should not be overstated.
Demand for London property is typically driven by various reasons including education, lifestyle, language, skillsets and its position as a key financial centre. It would not be easy to identify a comparable alternative investment destination to London in the short term.
Similarly, many have speculated that the decline in the value of pound would introduce a new stream of inward investment. However, we would caution that the impact of any inward investment may be overplayed as a significant portion of transactions in the past were by local UK residents as opposed to foreign investment. In the near term, there may be some short-term volatility but we would not expect any significant change in the fundamental demand and supply of the market with the continued structural undersupply of homes underpinning home prices in the market – especially in the more desirable and connected areas.