Here we are. Nearly a year in the making - Article 50 has been triggered. This could be the starting gun to a sprint forward for England, or it could be the match to a two-year fuse leading to a powder keg of unintended consequences. Or, Brexit could be something in between.
That's the thing - no one knows. And, about the only certainty is that too many people have fixed, unalterable opinions. So what about the First Time Buyer?
For a start, what has happened since last June? There has been some reporting of house price weakness. Certainly, the 2017 average price for London is down versus 2016; however, with Central London high-end properties many multiples the average, there is a strong statistical distortion at work: mean house prices are down, but median house prices are significantly less impacted. This reflects a wobble at the very top end of the market - a segment that transacts in property like fine art or conspicuous luxury. It also reflects less total housing market activity - some of those who have sold recently had other motivations. These are commonly financially sensitive transactions by "letter box buyers" that affect the averages, but don't really reflect the circumstances for the typical first home buyer - one choosing between renting and reaching that first rung of the property ladder.
What's happened in the past? In the last thirty years there have been flat spots during times of uncertainty and, differently, there have been house price corrections. Two flat spots in 2001-02 and 2011-12 reflected uncertainty created by external events - either the end of the tech boom giving way to the beginning of the Global War on Terror or the Eurozone crisis precipitated by Greece. To borrow Keynes' expression, these flat spots reflected subdued "animal spirits." By contrast, real pressure on the economy and banks, specifically, characterised both the early 1990's and 2008-09. Property prices declined in these periods. The Office of National Statistics observed, "There were seven years between 1980 and 2013 where, on average, UK house prices fell – the majority of which occurred during the recession of the early 1990s. The biggest drop, however, was 7.6% in 2009." There a two points to observe. First, in these periods, house prices had soared above long term trend for several years previously. Second, house prices recovered and surpassed their previous peak in roughly 5-7years - well within the average time that a homeowner keeps a particular property. The last 30+ years paint a picture of long term opportunity when there is short term house price weakness.
At the same time, financial markets have reacted more to Brexit than house prices. While shares are up, the pound is weaker. What about the banks? What about being able to get that mortgage? Those are very relevant questions. At least, we felt that way a StepLadder. We spent a lot of time with lenders and with advisors close to the banking sector in the weeks following the vote. The anticipation of possible systemic risk in the event of a Brexit vote combined with lessons learned from 2008 meant that liquidity safety buffers were in place for short term impact to be absorbed. This was a coordinated financial stability initiative led by the Bank of England and followed-up with further systemically supportive policy. Moreover, some of the challenger banks that StepLadder has gotten to know well expressed enthusiasm for the opportunity to grow market share in mortgage lending if larger incumbent competitors pulled back from the property market. Not surprising, many of the shares of these challenger banks are up 20%, 30%, or even 50% in the last twelve months.
With interest rates likely lower for longer and plenty of liquidity in the system, lending is in vogue among the leading providers of mortgages. However, one dynamic that has continued to gather pace regardless of Brexit is a decoupling of the market for private rental from primary residential homeownership. According to Savills, "The cost of renting in London is projected to rise by 24.5% and house prices by 10.9%." Higher interest rates for But-to-Let landlords and more costs translate into on-going rental increases. Versus still rising rents, this is even more economic incentive to buy versus rent semi-permanently.
Ultimately, owning your own home is as much psychological as financial. For many in the U.K., property is a rite of passage from parents' home in childhood to sharing a rental flat with university friends to a home for a family of one's own. This is a personal decision and one that goes beyond price movements and politics. If owning your first home is your priority, StepLadder is here to help!
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First Time BuyersMatthew Addison
Matt is the Founder and CEO of StepLadder. He started StepLadder to make a lasting positive impact on UK first-time home buyers and fix a broken system
