Caution due to the EU referendum is likely to affect the UK housing market in short-term, according to Lucian Cook, director of residential research as Savills.
Caution is likely to affect sales in the mainstream housing market in the UK as a result of the decision to leave the European Union but low interest rates will underpin prices, according to a new analysis.
The market is seeing initial caution, particularly among discretionary buyers, and this likely to curtail housing market activity as buyers’ willingness to commit to a major purchase weakens.
Over the medium term, the analysis from real estate firm Savills, suggests that sentiment will improve but also fluctuate as negotiations to leave the EU proceed. It also suggests that buyer sentiment is likely to lead to lower sales volumes in the short term.
Also, the possibility of tighter lending could pull transactions numbers further down from recent UK highs of 1.3 million a year. "However, at this stage, we do not expect sales volumes to decline to post credit crunch lows," said Lucian Cook, director of residential research as Savills.
The report points out that so far it has been business as usual for lending. "Should downside risks persist, there is a possibility that lenders tighten lending criteria. If stricter borrowing rules come into play, first time buyers and second steppers will be the most affected," Cook explained.
He believes that low interest rates will underpin house prices with the prospect of a cut in base rates and this may present opportunities for those on low loan to value mortgages.
Overall, house price growth is likely to slacken as a result of weaker demand in the short to medium term but looking ahead, Cook said that the possibility of a slower economy could have an impact on price growth. ‘We do not rule out the possibility of price falls in weaker markets. Low levels of house building has resulted in a market that is fundamentally undersupplied. This has not changed,’ he added.
The analysis report also points out that the short term impact on sentiment is also likely to vary geographically and between different buyer groups, in part dependent on the level of opposition to or support for Brexit. That would potentially indicate more caution in the domestic markets of London and among first-time buyers and second steppers but less among mature home owners.
"While this short term sentiment effect is likely to take longer to feed into the house price indices, we would expect the first indications of this impact to come from consumer confidence surveys and mortgage approvals," Cook pointed out.
"At this stage, it appears that the downside risks to the housing market are milder than the events that led to the 2008 financial crisis. However, political and economic uncertainty is likely to curtail housing market activity initially as discretionary buyers exercise caution,’ he said.
"The potential for lenders to tighten lending criteria presents a longer term risk to market activity, especially among first time buyers and second steppers. This could mean that UK housing transactions, which reached a post credit crunch high of 1.3 million transactions over the past year, fall back. At this stage, we do not expect sales volumes to decline to post credit crunch lows,’ he explained.
"Short-term weakening of sentiment is likely to slow annual rates of house price growth across the country. Thereafter, a squeeze on household finances and tightening of lending criteria look likely to act as a drag on house price growth. Regionally, we believe London is likely to see the biggest impact, given the extent to which affordability has become stretched in this market after a prolonged period of strong growth," he added.
"Though we cannot rule out price falls in some weaker markets or in the event of a more substantial economic shock, we believe prices will fundamentally be underpinned by a continued low interest rate environment and low supply," he concluded.
