Thursday, 30 June 2016

Post EU referendum – will history repeat itself in the Penicuik property market?

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:

1 comment:

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