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Brexit Uncertainty for the Housing Market
Britain’s housing market is in a febrile state. The Brexit vote has thrown prospective buyers and sellers into doubt over the wisdom and timing of their transactions — and getting it wrong could cost them dearly.
FT Money’s electronic postbag has this week been swelling with property-related questions, none of which are simple to answer while confusion reigns over the future shape of Britain’s relations with the EU, the tenor of the UK’s next political leaders or the economic ramifications of this momentous decision.
Will prices rise or fall and by how much? Should I wait to see what happens before buying or rush ahead before conditions change? Which way will mortgage rates head if the economic turmoil continues? And what would a recession due to my ability to keep up with the repayments? Those looking to buy are unsure whether they are buying at the right price, while sellers are fretting that their deal may not happen — and falling prices could thereafter leave them out of pocket.
Though less than a week has elapsed since the result, signs of changing behaviour in the market are beginning to emerge. While the negotiations are months away in Brussels, they have already started in earnest between Britain’s home buyers and sellers. Some of the former are putting purchases on hold or pulling out entirely, spooked by the lack of clarity over what is to come. Agents and brokers are reporting buyers asking for a 5-10% discount, even after the seller has formally accepted an earlier offer. Their behaviour seems entirely reasonable: why would you buy if you thought the price was soon to fall?
But it has also led to a Mexican stand-off between purchasers and vendors, the latter unwilling to give up on a price that might well not survive a subsequent testing in the market. In London, this state of affairs has been apparent for several months, prompting a fall in the number of top-end sales and a softening in prices. Brexit is set only to exacerbate this rebalancing of power towards buyers and is likely to spread beyond the capital.
For some, the decision to pause is relatively easy. One mortgage broker, Nigel Bedford of Largemortgageloans.com, said a Spanish-Australian couple working for international banks in the City of London had rung earlier in the week to pull the plug on their first-time purchase, since they were unable to ignore the growing possibility that in six months they might well be working somewhere else in the world.
For those in a chain, the prospect of falling prices cuts both ways: if all buyers demand a discount, sellers may be forced to take less; but if this happens across the market, they themselves could reasonably expect to prise a discount from the sellers of their next home. And if they are upgrading to a more valuable property, a 5% cut in its value should more than offset a similar discount on their own. The same formula works in reverse for those looking to downsize, of course — a further disincentive to sell for older owner-occupiers in homes too big for them who were already worried about losing out from a move.
What signals does the mortgage market offer potential buyers? The mood today could hardly be more different from the crisis atmosphere of 2008 when the banking system froze and lending dried up. For now, deals have hardly looked better or more abundant. Swap rates, which are used by lenders to price home loans, have fallen since Friday, giving them room to sweeten fixed-rate deals that were already plumbing record low rates of interest. Amid the volatility and speculation of last week, HSBC launched the lowest ever two-year fix at 0.99%. If other lenders respond, they are likely to do so in the next few weeks.
While the shorter-term fixes look temptingly unbeatable, borrowers would do well to consider the risks of emerging from a fixed-term deal onto a lender’s standard variable rate in two or three years time, just as the UK makes its definitive break with the EU following a two-year negotiation period. Five-year deals, though running at higher rates, may be a better hedge against deep uncertainty.
In the longer term, the bond market is pricing in a cut to base rates, on the assumption that Mark Carney, Bank of England governor, will at some point be forced to stimulate a slowing economy. If that happens, banks and building societies will have another reason to sharpen their appeal to borrowers.
Making calls about the long term, though, is a dangerous business. The counterargument to forecasts of lower rates is that sterling’s precipitous fall this week has raised the cost of overseas goods and services in a net-importing economy, and the inflation this triggers will require base rates to go up rather than down. That course of events is much less pleasant for mortgage borrowers to contemplate.
I apologize in advance to our perplexed readers, who are unlikely to draw comfort, let alone answers, from such “what-if” scenarios. When buyers wobble, estate agents’ traditional response — and one not without merit — is that buying a property is not just about acquiring an asset but a home in which to live, love and, for many, to bring up a family over many years: hold onto it long enough, and you increase your chances of reaching the sunlit uplands of recovery.
Brexit, though, appears to have introduced a worrying new sentiment among some buyers. I spoke to, a young UK professional and Remain voter who was due to exchange on her first property purchase, was not only concerned about taking on a large loan ahead of a possible recession but felt the referendum had undermined the rationale for her decision. “I’m no longer sure I want to buy in this country,” she said. “Do I really want to live here?”