How Brexit Hurts the Housing Market Too
Editor's Note: This article was originally published on Real Money at 9 a.m. on July 14.
As the consequences of the U.K. vote to leave the European Union continue to unfold, data released on Thursday show that fears are spreading from the commercial property sector to the housing sector.
The Royal Institution of Chartered Surveyors' monthly survey showed sentiment in the housing market souring and buyer inquiries down for the third straight month in June.
The headline national net balance for buyer inquiries, which indicates new buyer interest, was the lowest since the height of the global financial crisis in mid-2008. Strong growth last year and early this year had pushed prices to new record highs in London and the southeast of England before the referendum.
These are the most affected regions now, with the southern parts of England seeing the sharpest contraction in demand: 58% more surveyors in London saw a decline rather than a rise in buyer interest.
"Anecdotal evidence suggests that uncertainty relating to the E.U. referendum result was the primary driver of the slump although the higher stamp duty rates at the upper end of the market also continue to weigh on demand," the RICS said in its monthly report.
The previous government raised stamp duty for the most expensive properties and introduced an additional tax for buyers of second homes in an attempt to cool down rapid price increases that were getting out of control. It seems that Brexit was the needle that has pricked the bubble -- the question now is how fast it will deflate and whether the government can re-inflate it.
The RICS report shows that a net balance of 26% of the chartered surveyors polled in June expect a decrease in sales activity levels over the next three months, which was to be expected as the vote has heightened uncertainty.
But the picture doesn't look much better on a 12-month horizon: sales expectations for this timeframe turned negative for the first time in four years, with 12% more surveyors expecting transactions to fall rather than rise.
When it comes to actual prices, it looks like the London bubble is already deflating. June was the fourth month in a row when more surveyors reported price decreases rather than increases.
The first data about the residential property market after the Brexit vote comes hot on the heels of news of trouble in the commercial property sector, where a number of funds suspended withdrawals by investors, sparking fears of a crash.
It is possible that the downturn in the commercial property sector will not affect the economy too deeply. Jonathan Loynes, chief European economist at Capital Economics, said that the impact on investor wealth and sentiment is likely to be "fairly modest," as commercial property makes up only about 3% of assets under management in the U.K.
The construction sector accounts for only 6% of GDP, so even a 10% annual decline in construction output would shave off around 0.6% of economic growth. "Unhelpful, but not disastrous," as Loynes put it.
However, "bigger falls in capital values and output would clearly have more substantial macroeconomic and financial effects. And a major downturn in the residential market would magnify the effects on wealth and confidence," he added.
The RICS survey does not indicate a major downturn in the housing market, but price growth expectations over the medium term have definitely softened. Contributors to the survey now expect growth of 14% for U.K. house prices over the next five years, down from 20% in May. Hardly a serious slowdown, but investors should watch future surveys with more attention than until now.