A landlord of mine stopped me yesterday on the way back
from getting my sandwich at Greggs (no time for lunch out in these turbulent
times!) and said ‘You’re an Economist, now that this Brexit stuff has quietened
down a bit what should I do with my properties?’.
Now I am an Economist by training (and an Accountant for
my sins!) so that part was true but I had to set him straight on the other part
– things have not quietened down post Brexit yet ..... I wish!
However, what I have seen over the last few days is
interesting as to me it follows trends of previous bad times which is actually
comforting in a way as it gives us some indications as to what might, and I stress
might, happen in the future.
Some shares have fallen off a cliff .... but not all
Over the past week:
- New house builder shares have fallen off a huge cliff. Examples are that Crest Nicholson shares are down 40.0% over the last week and Berkeley shares are down 27.9%. Trading was temporarily suspended in shares in many of the house builders including Berkeley Group, Crest Nicholson, Barratt Development and Taylor Wimpey on Monday as they went into freefall
- Estate agents shares have fallen off a slightly smaller cliff. Examples are that Foxtons’ shares are down 38.1% over the last week and LSL (Your Move etc) are down 26.0%.
- Sales and lettings portals have fallen of an even smaller cliff – Rightmove is down 18.6% over the last week and Zoopla 23.3%.
- Lettings businesses have hardly been hit at all – Belvoir is down just 2.1% over the last week – which is bucking the market trend as the FTSE 250 (a good barometer of the UK market as a whole) is down 8.7% over the last week.
These are similar trends to previous recessions where demand for house
sales (new or second hand) have fallen sharply but, as a result, demand for
rented properties has increased significantly.
Anicdotal evidence from house builders
I
have a number of friends who hold senior mangement positions within house
builders. The mood music from them is
two fold: firstly, that house builders themselves are effectively ‘pausing’
projects that have not started to see how things pan out over the next wee
while and, secondly, that potential buyers are asking house builders for price
reductions on properties for sale on existing sites.
Again,
these are trends seen in previous recessions – pull up the draw bridge on new
sites until things are more certain and actively try and sell stock on existing
sites even if that means reducing prices.
Mortgage availability
The
banks are going through the an even harder times than house builders. There share price has absolutely tanked since
the EU Referendum and shares in RBS and Barclays were also suspended on Monday
as they went into freefall. Now I am not
saying that this is solely due to fears about the property sector (as they have
other worries as well particularly the ability to trade in the EU after Britain
leaves the EU) but fears about the property sector has impacted the banks’
share prices.
Given
the uncertainty, experience from past recessions would suggest that mortgages availability
may be reduced and mortgage criteria may be tightened thereby making it harder
to get mortgage funding particularly on purchases with lower deposits. In fact, I say the first example of this
coming to pass yesterday when TSB tighted up its Buy to Let mortgage criteria.
Interest rates
This
is a really interesting one. Certain
factors would suggest interest rates will go us eg Rating Agencies downgrading
the UK’s credit rating, lower Sterling meaning higher prices which will create
inflation which will need to be controlled.
However, other factors would suggest that interet rates will remain stable
and would be reduced if they were not already at 0.5% which means that the Bank
of England may need to ‘print money’ (Quantitive Easing) instead.
On
balance, it is looking like interest rates are set to remain stable in the
short term and there is a possibility of some printing of money.
Lower growth or even recession
The
turmoil caused by the EU Referendum vote in the UK and beyond will result in
lower growth in the UK Economy or even recession.
Let’s keep
perspective
Before the EU Referendum, George Osborne said that
house prices may fall by 18%. As I said
in my blog on Monday, I think that house prices will fall but not by 18%.
To
give this some context, the financial crash in 2007-08 did cause house prices
to fall. In Midlothian, the average
house price fell from a peak of £164,653 in August 2007 to a low of £136,278 in
February 2011 which is a fall of 17.2% and the financial crash of 2007-08 was
huge, the biggest since the Great Depression of 1929.
Pulling these factors together
Based
on the above trends, previous experience would suggest that we are likely to be
entering a period of huge uncertainty with lower growth or even recession as
well as tighter credit terms. This will
result in house prices falling as demand for houses is reduced but an increased
demand for rented properties which provided people with much more flexibility.
In
the last recession, the savvy (many said ‘brave’ at the time!), buy to let
investors with cash or access to finance (which harder to come by) continued to
buy properties as they could get them at competitive prices because demand for
properties to buy was lower and they could rent them easily as demand for
rented accommodation was high. They then
either sold the properties when the market picked up or held on to them as
longer term buy to let investors.
Will
history repeat itself in the Penicuik property market?
A few more interesting articles about the
Penicuik property market:
- Scotland votes remain, UK votes leave – what now for the 5,302 Penicuik landlords and homeowners? http://bit.ly/293AhoM
- Penicuik property – weirdest deal breakers http://bit.ly/28QAmw4
- Penicuik or Dalkeith for a Buy to Let investment. Which is the best? http://bit.ly/1Pv7ouS
- Who is to Blame for Crisis in the Penicuik Property Market? http://bit.ly/1VOjs0V
- £4,400 helping hand for
Penicuik first time buyers http://bit.ly/1XSYJJd
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