Keeping your head amongst the headlines

Keeping your head can be hard. Amid a torrent of sensationalist claims around what may or may not happen to the property market post-Brexit, what is actually happening according to the data? And what are the possible outcomes for the immediate future?

Here are some headlines from publications over the past two weeks:

“Brexit is officially starting to destroy property prices — especially in London”

“What doom and gloom? House prices failed to fall post-Brexit”

“Asking prices for houses fall as referendum uncertainty bites”

“House prices rising by £16,000 a year, says ONS”

“Brexit adds to house price decline”

“No major house price crash, forecasts PWC”

There couldn’t be more disparity here, and as a reader without much time to research – it’s nothing short of bewildering. At times of uncertainty, we need to turn to the facts and to the possible outcomes.

Looking at the hard data

Let’s take two headlines from the same top tier publication, published before and after Brexit:

June 2016: “Asking prices for homes in England and Wales rise to record high”

July 2016: “UK asking prices drop 0.9% since June”

Reading these in isolation gives polar opposite views on the state of the housing market. When you look at the data behind them, a different story emerges. Rightmove published data in June, showing that asking prices were up 0.8% – a rise to a record high. In July, post-Brexit, this rise was cancelled out by a drop of 0.9% – a drop that is within the usual range seen during the quieter summer months, which tend to see a decrease in asking prices.

So the real answer? Nothing much has happened yet, and the reality is, no one can say for sure what will happen just now. What we can do is look at the possible scenarios post-Brexit. When you look at residential property as an asset class, along with the factors that underpin the housing market, you may find yourself feeling differently about things…

The three possible scenarios for the housing market

So if nothing has happened yet – what might? Instead of trying to divine the future through a post-Brexit fog, here are the three scenarios that could occur, and how the property market tends to react:

Scenario 1. House prices continue rising – business as usual

This is not an unlikely scenario. Ultimately, Britain simply doesn’t have enough homes. Brexit or no Brexit, demand far outstrips supply, which is further exacerbated by population growth and low borrowing costs. The Bank of England is likely to reduce base rates even further in the very near future. This simple disconnect between supply and demand will continue to put upward pressure on the housing market over the medium to long-term; and even if prices dip, it will at least provide a solid floor.

Scenario 2. House prices stagnate – you’re still earning income

If house prices level off for a while, they’re still producing a solid income for investors. Even after all costs, investors can still earn between 5 and 10X interest rates, depending on the type of residential property they own, and where it is.

Scenario 3. House prices drop – take a look at the whole picture

Ultimately, despite two market cycles, UK residential property has seen no five-year period of negative total returns since 1973. Residential has delivered an annual total return of 10.2% on average over 20 years, far outstripping all other major asset classes – and particularly during economic downturns. Take a look at the graph below:

Click image to enlarge

The only period of loss for residential property followed the Global Financial Crisis of 2007. From its peak in February 2008 to its trough in April 2009, total returns for residential property in England and Wales fell 15.7%. The FTSE All Share total returns index, which peaked in February 2007 and bottomed out in February 2009, fell 41%.

This difference is due to the ‘stickiness’ of house prices. People don’t tend to panic sell their homes – they sit on them, and wait for things to improve. This removes stock from the housing market, and pushes prices back up. If you believe that Britain leaving the European Union is going to be as bad as the Global Financial Crisis, then you might look to purchase property around 15% below what it was worth pre-Brexit. Currently, asking prices are just 0.9% below.

The story is slightly different on our Resale market at Property Partner. Our users are investors with a share in property, not homeowners, and our Resale market allows you to list for sale in seconds, exiting quicker than you could in reality. While most investors have chosen to hold, there are some offerings available at higher levels of discount – though still at a profit to the price they were originally listed for. Whichever scenario you subscribe to for the property market post-Brexit, it would be well worth your while to take a look at some of these opportunities now.