Why property prices have plunged since Brexit vote
5 July 2016
Since the announcement that Britain has voted to leave the EU, the threat of recession is rippling through every industry in one way or another, having a severe impact on hundreds of thousands (if not, millions) of businesses.
House builders especially are experiencing disastrous loss, with the prices of properties crashing to as much as 40 per cent of their pre-Brexit value. What was previously regarded as strong stock-value is now at an all-time low due to the possible threat of another UK recession.
According to Reuters, approximately £8 billion has been slashed from the UK’s four biggest house-builders, Barratt Homes, Berkeley, Persimmon and Taylor Wimpey.
UK house-builders are not new to the effects of recession, with all four of the above recovering from the last one in 2008, reporting that they believed more growth was to come.
However, prior to the vote on June 23rd, doubt and lack of confidence had already started to build across the sector, with Berkeley predicting in the earlier part of June that there would be a 20 per cent fall in new home reservations.
So why is the house-builder sector witnessing such loss?
Back in May, David Thomas, Chief Executive of Barratt Homes warned that Britain leaving the EU would have a severe impact on skills within the sector.
He told the Guardian that between 30-40% of Barratt’s workforce came from mainland Europe, stating, “It wouldn’t be unusual to find 10-plus nationalities on a London construction site, and dual language signs.”
The industry is heavily-reliant on migrant workers. According to the CIOB’s ‘An Analysis on Migration in the Construction Sector report’, migrant workers are necessary and “…dampens the harmful effects of having a volatile labour market.”
Construction is different from other forms of work, such as factory or office. Local labour markets provide reasonable travel-to-work distances, therefore providing stability.
However, with the contracting element of construction, the workforce is constantly in flow, moving from location to location, which is often long-distance.
The workforce required for contract projects is often unable to fill the gap with a local labour market and therefore looks overseas to fill that gap. This means that the industry is reliant on a flexible workforce that can be called on at short notice and the migrant market is an ideal solution for this and has been for many years.
According to Indeed, the online job site, there has been a dramatic spike in Britons searching for work abroad after the vote, with Ireland, the US and Australia being popular destinations, adding to the possibility of further skills gap in the industry
Lower housing demand
With higher rates of unemployment, the inevitable knock-on effect is the lower demand for private housing. When unemployment looks like it may rise, less people will be able to afford to purchase their own house. According to economicshelp.org, “Even the fear of unemployment may discourage people from entering the property market.”
Other factors affecting the demand for housing include falls in investments from overseas. Prior to the UK leaving the EU, property investors from abroad invested heavily in the UK as this was a ‘safe haven’ for their cash.
Insight Director, Richard Donnell from Hometrack, a firm of property analysts recently told the Independent there will likely be “…a fall in housing turnover and a rapid deceleration in house price growth as buyers adopt a wait and see approach to the short term impact on financial markets and the economy at large.”
Additionally, there was an 11% rise in property deals being pulled at the weekend, according to a report in the Guardian.
Falling consumer confidence
Consumer confidence across the board is falling, with consumers changing plans for large purchases, including property.
Confidence is an important factor for consumers when determining whether or not they want to take a risk on a mortgage. If property prices have fell so much now, the fear is that they could continue to fall, ultimately deterring them from buying.
Sensitivity to economic instability
According to the June 2016 Markit/Cips survey of construction companies the main conclusions were clear:
- Construction output falls at fastest pace since June 2009
- Sharp reversal in residential and commercial activity
- Incoming new work declines at steepest pace since December 2012
Confidence in the sector is at an all-time low. Construction firms have cut back on buying and are taking precautions in their recruitment efforts. Additionally, purchasing activity has hit an all-time low.
Tim Moore, senior economist at Markit, said: “Construction firms are at the sharp end of domestic economic uncertainty and jolts to investor sentiment, so trading conditions were always going to be challenging in the run-up to the EU referendum.
“However, the extent and speed of the downturn in the face of political and economic uncertainty is a clear warning flag for the wider post-Brexit economic outlook.”
Lower mortgage availability
During the two decades known as the ‘boom years’ – 1996 and 2006, banks were keen to lend mortgages. Borrowing was up to five times the income of the buyer and required low or even zero deposits (100% mortgages). This era of easy mortgage availability meant that house demand increased as affordability was widespread.
However, since the recession of 2007, banks struggled to raise funds for lending, meaning criteria for borrowing is tighter and larger deposits are needed to purchase property.
This combined with the possibility of a recession will make it even harder for people to pass for mortgages, thus having an impact on the demand for property and the new-build housing market and therefore the profitability of the sector.
Less foreign bank loans
The lack of stability in the house-builders industry has led to the amount of foreign lenders dwindling. The United Overseas Bank (OAB) has temporarily ceased lending altogether post-Brexit.
A spokeswoman for the Asian bank, one of the world’s largest lenders said, “As the aftermath of the UK referendum is still unfolding and given the uncertainties, we need to ensure our customers are cautious with their London property investments.”