By: Mark O'Byrne

UK property market forecast to take hit on political uncertainty

The United Kingdom has been dealt a couple of ‘shocks’ in the last year – Brexit and the Conservative’s lost majority in Parliament.

The only thing that these results definitively mean for the country is uncertainty. Whilst every voter and British resident works to navigate these unclear times there is an air of nervousness about how things will pan out. This is becoming clear through the commonly used temperature gauge of any Western economy – the housing market.

Latest data suggests that both Brexit and the UK election have negatively impacted the already overheated property market. With little foresight as to how the economy and government will move forward, the housing industry is feeling nervous.

“The general election is again commonly cited as a factor hindering activity, causing some hesitancy from both buyers and vendors.” stated RICS upon release of their latest survey. Prices have also been affected by Brexit. Before Britain voted to leave the EU, the UK had seen year-on-year price rises of almost 10 percent, now house prices are either stalling or falling.

Housing market tense and uncertain

A survey carried out by Royal Institution of Chartered Surveyors (RICS) found brewing problems in the market were largely down to concerns over both the outcomes of the snap election and Brexit.

The professional body reported British house prices had risen at their slowest rate since August 2016, in May. Volumes were also down as enquiries from new buyers, new instructions from those wanting to sell and agreed sales had all declined during May, with the number of homes being put up for sale falling the most since just after the 2016 Brexit result.

The British Pound may well weaken further as we head into Brexit negotiations. This will provide international buyers with the further opportunity to purchase with a favourable exchange rate. However, they too do not like uncertainty and will likely look for more concrete assurances on how this will all play out.

Over the medium term it’s not all bad news for house prices, according to RICS contributors house prices are expected to increase at a faster pace than wages over the medium term. In short, first-time buyers will continue to suffer as the gap grows.

Currently UK house prices are nearly 8.5 times average earnings. Despite figures suggesting a fall in house prices the ratio is still at a level has not been seen at since the last property boom. On average it has never been financially easier to get a mortgage. Interest rates remain at record lows in recent years so debt servicing levels remain affordable (for the time being!).

So long as interest rates stay very low, new borrowing could keep the property market going and UK house prices buoyant at least for a while longer. However this isn’t taking into account low sentiment or government policy.

Will the government lose interest?

Western governments thoroughly enjoy riding on the wave of (and supporting) increasing house prices. But this can backfire if it is the result of a housing shortage. In the UK shortages are a major problem. UK governments have repeatedly promised to solve this problem but have rarely made headway.

One of the immediate effects of the weak Conservative victory is the shakeup in both cabinet and policy. After weak RICS data, the housing market really needed an injection of confidence this last week. However, at the moment uncertainty just continues to grow given the removal of housing minister Gavin Barwell.

The housing brief of the last government is now unlikely to be priority given Brexit negotiations and now a minority government in power. Housing market policy will be closely monitored by market participants in terms of how much government can reaffirm commitments to the pre-election policy direction rather than switch things and create further disruption or uncertainty.

The most recent housing policy white paper outlined ways and means to expand housing supply. In addition, the industry and government had both shown interest in supporting new methods of delivery such as build to rent and off-site construction. Progress in any of these areas is unlikely to be evident for some time, especially so prior to Brexit.

For new builds and development this could be a major problem, as Hayley Scott from Investec Structured Property Finance told CityAM,  “Volatility and uncertainty may return to the sector….A number of proposed new projects may indeed be put on hold as the property sector takes stock of this result. Banks are likely to be cautious about financing new developments. Real estate as an asset class will lose favour with institutional and overseas investors as doubts hang over the UK real estate sector.”

Concluding thoughts

A collapse in the housing market would devastate the banking system and sterling. Confidence affects sentiment. Very few markets enjoy uncertainty and the property market is no exception. Sentiment in property markets generally changes more slowly than in more liquid, traded markets but when it does, it is as powerful a driver of prices.

In the short to medium term, Mrs May’s government has a lot of work to do when it comes to assuring markets, investors, buyers and sellers that they have this ship stable and there is nothing to worry about when it comes to property. Right now, these reassurances seem to be hot air, the longer this goes on the more damage will be inflicted on an already delicate situation.

Ultimately it is easy money that has lead us into a situation where a couple of elections can put a multi-billion pound industry close to its knees. Investors would be wise to prepare for a time (in the not too distant future) when times become tough thanks to weak sentiment and low confidence.

It is not just in the UK that property prices look over valued. In the event of price falls, gold is likely to act as a hedge and preserve wealth. Investors should select a reasonable allocation to gold bullion which is held in allocated and segregated storage.  Owning these assets away from the system which fuels these overheated property markets will soon be seen as prudent.

News and Commentary

Short term risk this week, then “gold should begin to move higher again” – GoldCore (MarketWatch.com)

Gold notches 5th-straight day of losses ahead of Fed decision (MarketWatch.com)

ECB sells USD, buys €500m of Chinese renminbi (Europa.eu)

UK currency traders abandon extradition fight, agree to face charges in NY (Telegraph.co.uk)

‘Brexit squeeze’ hits families as inflation soars to 2.9 per cent (Standard.co.uk)

Source: Bloomberg, U.S. Global Investors via GoldSeek

Gold is back in fashion – and back in value (FTAdviser.com)

Gold SWOT Analysis: Strength Is Justified – UBS (GoldSeek.com)

Zimbabwe: When The Black Market Becomes The Real Market (ZeroHedge.com)

Massive Central Bank Asset Purchases: Last Ditch Effort To Save Economy & Cap Gold Price (GoldSeek.com)

‘Horrendous storm’ to hit stocks, Wall Street not rational – Stockman (CNBC.com)

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 -- Published: Wednesday, 14 June 2017 | E-Mail  | Print  | Source: GoldSeek.com

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