Will the Housing Market Weather the Brexit Storm?
UK Housing Market Faces Stern Test Post-Brexit
In the run-up to the Brexit referendum on Thursday, June 23, 2016, then Chancellor George Osborne warned of the dire consequences of a Brexit. Now, 2 months later the UK housing market appears resilient but concerns remain. There has been a dramatic decline in buyer interest according to estate agents in the UK, and there has been a freeze of real estate funds to protect the industry. Since the global financial crisis in 2008/2009, property prices across the UK became bullish and prices are increasing in and around London. Whether or not the property bubble is about to burst is anyone’s guess, and spread betting traders have seen tremendous activity among traders in this regard.
What is clear is that there are structural issues in the UK housing market that have not been resolved. Housing price instability is rife in the UK, as evidenced by booms and busts over the years. Relative to income levels, housing prices in Britain have surged. London remains the most vulnerable of the property markets in the UK, and a mass exodus of property owners could bring the city to its knees. According to HM Revenue & Customs, there was little difference between June and July economic data in the housing market. And, the RICS (Royal Institute of Chartered Surveyors) remains optimistic about the robustness of housing prices in the UK. Perhaps the most positive change came when the BOE slashed the bank rate from 0.50% to its present level of 0.25%.
Severe Income Inequality and Wealth Inequality in the UK
With borrowing costs at multi-year lows, it is far more affordable for homeowners in the UK to finance new mortgages, refinance at lower rates, or become first-time homeowners. Home ownership in the UK is now at a 30-year low, and many would-be first-time homeowners are simply unable to afford the downpayment or the mortgage. The widening gap between haves and have-nots is one of the many structural problems that the UK economy is faced with. The Gini coefficient (a measure of the disparity between wealthy and poor) points to a severe economic inequality in the UK. The UK ranked at #6 in terms of most unequal income distribution for the top 30 countries. The top 20% of the country controls 40% of the country’s income and 60% of its wealth, while the bottom 20% generates 8% of the country’s income and just 1% of its wealth.
A Correction in Property Prices Could Ultimately Boost the UK Economy
The government has attempted to improve the plight of the low income earners by implementing help to buy schemes. The problem is that prices have risen and demand has increased, but dormant supply has led to a property bubble. In and around the city of London, there are many obstacles remaining and even the new mayor, Sadiq Khan is not invested in building on the greenbelt. The residential property market remains under pressure in the UK and this is a precursor to an impending recession. The problem in the UK is precisely the opposite of the problem that the world is experiencing with the crude oil glut. Excess supply and inadequate demand is keeping prices depressed, and that’s why a production freeze has been called for. For the UK, the solution may well be a correction to property prices of around 20%. When prices become more affordable, property ownership will be boosted.
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About Brett Chatz
Brett Chatz is a graduate of the University of South Africa, and holds a Bachelor of Commerce degree, with Economics and Strategic management as his major subjects. Nowadays Brett contributes from his vast expertise in online trading for spreadbettingreview.co.uk.