Ten days on from the Referendum, we review the key moments of a week and a half filled with financial market and political turbulence. In particular, we examine what this means for the UK’s housing market and what might happen next. In the moments before the UK polls closed on June 23rd, the UK Pound reached its highest level against the US $ in more than six months. Just seven hours later, and with the unexpected result emerging that the UK had voted to leave the EU, its value had dropped by almost 11%. As the outcome of the Referendum became clear, the value of Sterling began to drop, recording its biggest one day fall against the US dollar in history on Friday 24th June. On Monday 27th, it reached its lowest level in more than 30 years at $1.31. The Pound also lost 9% of its value against the Euro, hitting € 1.19 on Monday 27th June. Standard and Poor downgraded the UKs credit rating from the top ranking of AAA by two steps to AA, saying that the vote to leave the EU could lead to “a deterioration of the UK's economic performance, including its large financial services sector”. This followed the move by Moody’s to downgrade the UK’s credit outlook from stable to negative and Fitch lowering its rating from AA+ to AA, forecasting an “abrupt slowdown” in growth in the short-term. The stock markets also felt the effects of the surprise outcome of the result with the FTSE losing 500 points on opening, with European and global markets also suffering large falls. House builders were some of the hardest hit companies as share prices fell on Friday 24th June. It remains to be seen how many developers are forced to put their pipelines on hold and what the impact will be on housebuilding levels throughout the country. Instability has not been restricted to the financial markets. The political fallout continued throughout the following week, starting with the resignation of David Cameron on Friday 24th June. As the Tory leadership campaign gets underway and turmoil unravels within the Labour ranks it is hard to imagine how the UK political stage will look in a few months’ time.
However, it is not all doom and gloom. News that there will be no immediate emergency Budget and the reluctance to trigger Article 50 straight away has offered a little respite. Savvy investors looking for opportunities have been buying up stocks and the financial markets started to rally as the week progressed. By the close on Wednesday night, the FTSE 100 had regained all of its losses, closing 22 points higher than on 23rd June. The pound had also regained strength against the dollar, trading at around $1.35 on Thursday morning. On Thursday afternoon the Governor of the Bank of England, Mark Carney made a statement saying: “The UK can handle change. It has one of the most flexible economies in the world and benefits from a deep reservoir of human capital, world-class infrastructure and the rule of law. Its people are admired the world over for their strength under adversity. The question is not whether the UK will adjust but rather how quickly and how well." As the possibility of a further stimulus plan and a cut to interest rates over the summer was announced, the FTSE rallied further, hitting its highest level for 10 months. However, the news caused Sterling to fall back against the dollar to around $1.32. With Brexit negotiations yet to start, and uncertainty surrounding our political leadership, further fluctuations in the market are likely for some time to come. There is little doubt that confidence in the City has been dented. While final decisions on relocations may be delayed until the situation becomes clearer, companies will be reluctant to hire in this period of uncertainty and jobs creation in the City is likely to stall.
Impact on UK housing market
Various commentators have spoken out over the week about the likely impact of the Brexit result on the UK housing market. The consensus is that the short-term impact will most likely be felt in the level of transactions, as buyers await some clarity. A number of agents have reported buyers pulling out of deals in the wake of the Brexit outcome. Meanwhile, at Oakmayne Properties’ Two Fifty One development in Elephant and Castle, some buyers chose to take the developer up on its pre-agreed Brexit clause, allowing them to withdraw from the sale while being able to keep their deposits.
Mortgage approvals data published on Wednesday pointed to a pick up in activity in May, bouncing back from the stamp duty wake. However, as buyers put moves on hold, it is unlikely that this will translate into a pick up in sales just yet. On 14th July, the MPC will meet for the first time since the Referendum, with a possibility that interest rates may be cut to 0%. Either way, the continuation of the low mortgage rate environment is expected for the time being. Once the dust settles, this should encourage homebuyers who had been considering a move to come back into the market.
As such, while house prices across the country are expected to take something of a hit, the current expectation is that falls will be limited to low, single-digit levels. The low supply environment should continue to support prices in the longer term and large falls are unlikely.
London’s housing market
London, particularly the most central parts, is likely to be hardest hit by the continued fall out of the Brexit vote. Before the result was announced, the market was already subdued. Transaction levels were down, having been affected by high costs of purchase and the market was coming to grips with the surcharge for investors and second home buyers introduced in April. Over the next few months, sales levels are likely to remain low, as the fallout from both the additional stamp duty and Brexit vote takes effect. However, there are a small number of investors already spotting buying opportunities within the market. With other currencies gaining strength against the Pound, overseas buyers have seen their buying power increase. Cash rich buyers could continue to take advantage of opportunities in the market in the weeks and months ahead.