Brexit a red herring for UK residential property market
Unless you’ve spent the last few months sailing the Mariana Trench or dusting off the Mars Rover, you’ll have noticed that we’re entering into the final stretch of a referendum on EU membership.
It would be nice to say we didn’t expect the debate to get this hysterical – but who would we be kidding? From our long-treasured freedom to buy bananas in bunches to grievous tidings of continental war, you’d be forgiven for thinking that almost every aspect of our daily lives hinges on this momentous decision. Pensions, international trade, jobs, workplace rights…with each passing day the list gets bigger, and the degree to which they will be destroyed more drastic.
It is a big decision, of course – one that may well have important consequences in many areas. But the problem with this narrative is that it drowns out the middle possibility: that for a lot of things, in a lot of areas, a Brexit wouldn’t make much difference at all, either way.
The UK’s property market is potentially one of these areas. Given its status as an economic bellwether, and the fact that many voters attach great importance to house prices, the Treasury unsurprisingly sought to use it as ammunition in one of its many broadsides against the Leave campaign – with Osborne warning of the dire effects of a Brexit on the housing market.
The fact is, Brexit is little more than a red herring when it comes to Britain’s property market. Again, this is not to say the outcome will have no effect. While much is uncertain, it is possible that a post-Brexit economic shock – all things being equal, and if it is a severe as the doom-mongers fear – could deter some investment. On the other hand there is a case to be made that being freed of EU bureaucracy might liberalise the market in certain beneficial ways.
But as with all Brexit arguments, the analysis should not solely focus on whether a Brexit would have positive or negative consequences, but also on whether these consequences make a meaningful difference to the big picture. In the case of the UK property market, whether the above scenarios come to pass or not won’t meaningfully change the fundamentals of supply and demand. Nor will it make a real difference to the nature of the challenges it faces, or the solutions that are needed.
For instance, the market is to a large and increasing extent buoyed by Chinese investment. The various factors driving this – the relative stability and maturity of [the UK] market, the standard of educational institutions, great infrastructure, cultural and geographical position in the world, long-term demand caused by a rising population set against an acute housing shortage – are largely independent of [the UK’s] membership of the EU.
In or out, British property will remain an attractive destination for foreign money. Even if some of the worst economic predictions of the Remainers come true, Britain will still be one of the world’s premier property markets. It’s also worth bearing in mind that projects within the property market typically operate on 6-12 month cycles – activity is not as sensitive to the tos and fros of day-to-day speculation as other markets can be. As reflected in comments from the boss of top London property developer Telford Homes, there is a lot of momentum in the UK property market today, and a Brexit is unlikely to derail it.
The housing point is crucial here, both in that it is so central to the dynamics of our property market, and also in that the challenge it represents eclipses other considerations in terms of importance. We face a severe housing crisis. England alone needs a minimum of 260,000 new homes a year to cope with rising demand. The current level of new supply is less than half of this, and the last time it reached equivalent levels was decades ago. The root causes of this – a rising population, years of underinvestment – have nothing to do with our EU membership. Whatever happens on June 23rd, we will be facing the same crisis on June 24th.
The desperately needed solution will also be the same, either way – as will the main reason why we struggle to create the necessary supply. We need to get building. Most of the new builds today are borne by the big developers, but they’ve warned that they alone are not in a position to meet the demand. The core problem is that we have a dysfunctional property market that punishes our small-to-mid-sized developers. Their projects generally don’t fit the contemporary risk profile of banks, and so they find it difficult to raise funds quickly enough to seize opportunities.
The opportunities are certainly out there, as is the money (in our low-yield environment there are plenty of professional and institutional investors out there, sitting on cash, who would relish the chance to get involved). The problem, historically, has been connecting these two segments of the economy in an efficient, safe and convenient way. But in the age of disruption, disintermediation, online networks and platforms, this should no longer be a barrier. Innovations such as syndication will also have a part to play. Certain remainers whisper in horror about the prospect of being cut off from European money, but if we can substantially de-risk property investment for certain classes of investors, then we could unlock a large swathe of domestic demand for the asset class.
This is the crucial test for our property market, this is where our minds and innovative efforts should be focused. We can succeed or fail both within and without the EU – it won’t make a blind bit of difference. Looking at it this way, all the ‘what ifs’ and uncertainty around Brexit and the property market are a distraction from what we know is (and will remain) the case. The importance of the Brexit outcome to the UK property market can be summed up in a quintessentially British phrase: keep calm and carry on.
Janine Lewis is CEO and founder of InvestSure