On 23rd June 2016 the UK voted to leave the European Union. Uncertainty has been high, and speculation has been rife, but let’s pause for a moment and look at what has happened.
Contrary to the predictions of many economists, the UK has not seen an immediate and significant impact on consumer confidence and the economy. We spent £168 million on credit cards in July, which is both higher than in June and also the average of the previous six months. UK retail sales figures also follow a similar trend and have been rising for the past three years. Compared with July 2015, July 2016 retail sales were up 5.9%, mainly assisted by the warm weather and the weaker pound.
Inflation, measured by the Consumer Price Index (CPI), rose to 0.06% in July and according to the Office for National Statistics (ONS) that has been no apparent impact from the Brexit vote.
The ONS also reported a sharp rebound in the manufacturing sector in August and the UK industrial output grew at its fastest rate for 17 years in April to June. According to Markit, Eurozone economic activity was at its highest for seven months in the month of August.
New Prime Minister
Pro-remain campaigner, David Cameron, resigned the day after the referendum. He quickly was replaced by Theresa May when rival Andrea Leadsom pulled out of the contest. Boris Johnson became Foreign Secretary, and the remainder of Theresa May’s cabinet was formed.
After the referendum, the Bank of England has taken a series of measures to support the UK economy. Interest rates were cut to an all-time low of 0.25%.
Quantitative easing has also been extended, with an extra £70bn flowing into the economy. The Bank of England has also formed a £100bn scheme to ensure banks pass on the low-interest rates to consumers and businesses.
The day immediately after the referendum on Thursday 23rd June we saw a dramatic fall in the value of the pound. On 15th August we saw it drop to a three-year low against the dollar of $1.2869. Sterling has remained relatively low due to uncertainty about the economic outlook and also speculation around how the future relationship with the EU will look like.
The slash in interest rates has contributed to the pound remaining weak. Looking back one year we can see that the pound is significantly down against the dollar and the Euro. Currently, the pound is at $1.33 against the dollar, compared with $1.57 this time last year, a fall of 15%. Currently £1 is worth €1.19, compared to €1.35 this time last year, this represents a drop of 12%.
There have, however, been some positive impacts from the currency devaluation. Tourism is on the up as travelling to the UK is now relatively cheaper for tourists. Forward Keys, a travel analytics company, reported that flight bookings to the UK increased 7.1% after the Brexit vote. A tour operating company called Caissa Touristic that focuses on Chinese travel to Europe have seen a 20% increase in enquiries and bookings for the UK this summer compared to last year. Ryanair has also expressed a similar increase in demand.
Formal negotiations with the EU have not commenced as of yet; however Theresa May has met with various EU leaders, such as Germany’s Angela Merkel, France’s Francois Hollande. Article 50 of the Lisbon Treaty sets off the two year exit process, and EU leaders are refusing to begin negotiations until this happens. Mrs May has stated that she will not trigger Article 50 until the start of 2017 at the earliest.
Brexit has had an immediate impact on confidence and sentiment in the property market, however we are only recently getting the relevant data through to start to have a clear image of the impact so far.
Contrary to popular belief, house prices are actually up 5.6% this August, compare with the same period last year. A likely explanation for this is the lack of property for sale currently. Properties for sale are at a near 30 year low which has helped keep price levels strong and consistent. This is also backed up by data released by the Bank of England that show that new mortgage approvals have fallen to its lowest for a year and a half in July.
The Royal Institute of Chartered Surveyors (RICS) have forecast that UK house prices are likely to fall slightly in the short term as the market pauses for breath but then begin to rise again. They have predicted that house prices will begin moving upwards again within 12 months. This creates a buying opportunity in the short term as many investors may be put off by the uncertainty, which creates room for negotiation and potentially improved incentives from developers.
CBRE have release data on commercial property that shows demand for office space in London has bounced back from an immediate dip post Brexit. The numbers are showing a 24% increase in space being snapped up by companies from June to July.
There are no migration figures or reports since Brexit, however in the year to March Net migration was at 327,000 which is at near record levels. Overall there has been a slight shift, with more individuals settling in the UK from Bulgaria and Romania and slightly less settling from Poland and various other eastern European countries. Future migration will very much be determined by the policies put in place throughout the reform of the UK-EU relationship.
The fall in the value of the pound since the vote has increased the cost of imports for manufacturers. We have long been running a trade deficit in Britain, meaning that overall we import more than we export.
We do sell more services abroad than we import – but overall we still have a bigger deficit in the value of the goods we sell abroad, compared to the value of the goods we import.
In June, Britain’s trade deficit widened to £5.1bn after imports hit a new high.
A weaker pound may help exporters as their products will now be cheaper, but it could also cause inflationary pressures in the UK as the costs of imports and raw materials will increase.
The construction industry saw a significant drop in activity that begun just before June’s referendum. However, if we look at the Markit/CIPS UK Construction Purchasing Managers’ Index that measures the level of construction in the economy, we can see that in July we saw a rise from 45.9 to 49.2 in July (below 50 reflects a contraction, above 50 represents an expansion of construction).
It appears that there has been a cool down in August for construction, which is likely to lead to further supply issues in the short term, as building houses is a priority right now.
Unemployment fell in the lead up to the referendum, down to 4.9%. Unfortunately there is not a lot of data covering the period after the referendum; however it has been forecast that there will likely be a drop in permanent hiring in the short term due to the uncertainty, potentially down to levels not seen since 2009.
Overall the signs for the property market are relatively positive, certainly compared to initial forecasts for the effects of Brexit. There is likely to be uncertainty for a short period while everything is worked out, however the fundamentals still remain strong for property. Supply is still far too low and there is no sign of falling demand. There is certainly a stronger case now for investing outside of London than there has been for a long time. All going well, the Government can negotiate a strong relationship with the EU for the UK… watch this space!