Brexit and the property market

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We focus on senior secured direct lending strategies with short durations that offer stable and attractive returns, protection and liquidity.

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In this article we analyse the circumstances of the UK property market and attempt to discern the likely direction of prices and volume against the uncertain backdrop created by Brexit and the potential for a no-deal exit.

As a senior lender in short duration real-estate backed loan we are very well protected against even very severe economic downturns (we can sustain a correction of 40% in real estate prices on average). We currently see the market as healthy and attractive.

Brexit and the property market

Four years ago, the United Kingdom decided to leave the European Union, thus starting a lengthy and painful process that is about to come to an end with a sealed Brexit now acted and the details of the exit terms due to be set within weeks. As property lenders, Katch Investment Group is clearly keeping a close eye on UK housing values as a precipitous fall in price might affect the level of security achieved across our transactions. Of course, with effective average Loan-to-Value of around 50%, it would take nothing short of an unprecedented disaster for our collateral to fall below of the value of our loans, but it is important for us to maintain a substantial amount of protection above and beyond what is due to the Fund at any point of time.

Way back in September 2018, the governor of the Bank of England, Mark Carney, warned that leaving the EU with no deal could be catastrophic, sending unemployment soaring and house prices plummeting, but most property experts think that the effects on the housing market would be less dramatic than this. This is particularly true outside the Greater London area where prices are less volatile, less elevated and therefore less likely to experience a severe drawdown. The ownership structure of the housing stock outside the capital City also provides support since properties are by and large almost exclusively owned by UK citizens in smaller cities. These are unlikely to leave the country in significant numbers and therefore provide support to property price.

While the UK has now left the EU with a deal that puts a transition period in place until the end of the year following the Conservative win in December 2019’s general election, having no trade deal with the EU at the end of this will still have a negative effect as it will be harder and more expensive to sell goods and services in Europe. The UK also needs to set up deals with the other countries it previously had arrangements with as part of the EU. The market however has been remarkably resilient, perhaps in contrast to what property experts were expecting.

Brexit and house prices

The referendum didn’t have a big effect on average UK house prices at the time and they continued to rise, albeit more slowly. Land Registry data shows that average UK house prices continues to go up at a rate that is consistent with which experienced in the 5 years prior to Brexit (June 2016).

Source: ONS

This is spite of the market slowing because of the extra 3% added to stamp duty for buyers of second homes and buy-to-let properties in April 2016, and uncertainty around the referendum, which resulted in fewer properties on the market as well as fewer buyers.

The overall picture between then and the September 2020 was that house prices grew slightly more slowly than before, especially in the south and east of England, although prices still rose across much of the UK. However, the housing market has had a boost since the election, supported by good employment conditions and a still competitive mortgage market. The Covid crisis seems to have had a positive impact, perhaps surprisingly, as the Government introduced a stamp duty holiday for transactions up to half a million pounds- which resulted in a sharp increase in transaction volumes as well as a continuous, albeit controlled, rise in price.

House prices after Brexit: what will happen?

What is likely to happen to house prices and the property market over the coming months? While London felt the impact of Brexit uncertainty more than many other parts of the UK, prices there have started to rise again. Insider show a fair degree of positivity with the widespread view that the market is going to carry on rising moderately. The government has put in place or confirmed several measures meant to boost market activity and support price- these include the all-important Help-to-Buy scheme (confirmed until 2023) and the Stamp Duty holiday, until the Spring of 2021 but expected to be extended should the market soften. All in all, most indicators are flashing green and the reasons to be moderately bullish are plentiful.

Property experts and Surveyors, who both have considerable insight as a group into market trends, have voiced their recent optimism. A Reuters poll of property experts in July 2020 predicts that house prices in the capital will rise by 2% this year and next year. Two thirds of respondents said that housing market activity in London is likely to accelerate over the coming year. In the UK as a whole, Surveyors say that house prices are expected to rise in the near term and over the coming year in all parts of the UK to varying degrees following the confidence boost from the election result.

The numbers of both buyers and sellers are expected to pick up, and so is the number of sales, over the next year. After a period of suppressed market activity due to Brexit and political uncertainty, the clear outcome of the general election in December 2019 injected some much-needed confidence into the market.

Brexit and mortgages

As the property market slowed a few quarters ago and there have been fewer mortgages taken out, lenders have been competing even harder for customers for both purchases and re-mortgaging. This means that plenty of good mortgage deals are available and lenders are keen to lend so are being flexible. The latest figures from the Bank of England showed that the number of mortgages approved for house purchases is going up and is at its highest level since February 2016.

Generally speaking, financing conditions remain very accommodative. The Bank of England base rate fell to 0.25% after the referendum, went up to 0.75% but is now only 0.1%- an historically low level. As a result, the mortgage market remains extremely competitive and mortgage rates offer borrowers the chance to lock their mortgage down with extremely low fixed rates.


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