How Would a Hard Brexit Affect Clapham House Prices?

I have been asked a number of times recently what a hard Brexit would mean to the Clapham property market. To be frank, I have been holding off giving my thoughts, as I did not want to add fuel to the stories being banded around in the national press. However, it’s obviously a topic that you as Clapham buy to let landlords and Clapham homeowners are interested in ... so I am going to try and give you what I consider a fair and unbiased piece on what would happen if a hard Brexit takes place in March 2019.

After the weather and football, the British obsession on the UK property market is without comparison to any other country in the world. I swear The Daily Mail has the state of the country’s property market on its standard weekly rotation of front-page stories! Like I have said before on my blog, there are better economic indexes and statistics to judge the economy (and more importantly) the property market. If you recall, I said the number of transactions was just as important, if not more, as a bellwether of the state of the property market.

Worries that the Brexit referendum would lead to a fast crash in Clapham (and national) property values were unfounded, although the growth of property values in Clapham has reduced since the referendum in the summer of 2016.

Now, it’s true the Clapham property market is seeing less people sell and move and the property values are rising at a slower rate in 2018 compared to the heady days of the first half of this decade (2010 to 2015), but before we all start panicking, let’s ask ourselves, what exactly has happened in the last couple of years since the Brexit vote?

Lambeth and Clapham House Prices have dropped by 1.55% since the EU Referendum...

...and yes, in 2018 we are on track (and again this is projected) to finish on 3,879 property transactions (i.e. the number of people selling their home) ... which is less than 2017 ... and not too far below the long term 12 year average of 4,071 transactions in the local council area.

So, it appears the EU vote hasn’t caused many major issues so far, however, if there was a large economic jolt, that could be a different game, yet how likely is that?

The property market is mostly influenced by interest rates and salaries.

A hard Brexit would subdue wage growth to some degree, yet the level of the change will depend on the undetermined type of Brexit deal (or no deal). If trade barriers are imposed on a hard Brexit, imports will become more expensive, inflation will rise and growth will fall, although at least we are not in the Euro, meaning this could be tempered by the exchange rate of the Pound against the Euro. In plain language, a hard Brexit will be worse for house prices than a deal.

So why did the Governor of the Bank of England suggest a disorderly hard Brexit would affect house prices by up to 35%?

I mean it was only nine years ago we went through the global financial crisis with the credit crunch. Nationally, in most locations including Clapham, property values dropped in value by 16% to 19% over an 18-month period. Look at the graph and if we had a similar percentage drop, it would only take us back to the property value levels we were achieving in 2015.

And let’s not forget that the Bank of England introduced some measures to ensure we didn’t have another bubble in any future property market. One of the biggest factors of the 2009 property crash was the level of irresponsible lending by the banks. The Bank of England Mortgage Market Review of 2014 forced Banks to lend on how much borrowers had left after regular expenditure, rather than on their income. Income multipliers that were 8 or 9 times income pre-credit crunch were significantly curtailed (meaning a Bank could only offer a small number of residential mortgages above 4.5 times income), and that Banks had to assess whether the borrower could afford the mortgage if interest rates at the time of lending rose by three percentage points over the first five years of the loan ... meaning all the major possible stumbling blocks have been mostly weeded out of the system.

So, what's next?

A lot of Clapham homeowners might wait until 2019 to move, meaning less choice for buyers, especially in the desirable areas of Clapham. For Clapham landlords, Clapham tenants are also likely to hang off moving until next year, although I suspect (as we had this on the run up to the 2015 General Election when it was thought Labour might get into Government), during the lull, there could be some Clapham buy to let bargains to be had from people having to move (Brexit or No Brexit) or the usual panic selling at times of uncertainty.

Brexit, No Brexit, Hard Brexit … in the whole scheme of things, it will be another footnote to history in a decade. We have survived the Oil Crisis, 20%+ Hyperinflation in the 1970’s, Mass Unemployment in the 1980s, Interest Rates of 15% in 1990’s, the Global Financial Crash in 2009 ... whatever happens, happens. People still need houses and a roof over their head. If property values drop, it is only a paper drop in value ... because you lose when you actually sell. Long term, we aren’t building enough homes, and so, as I always say, property is a long game no matter what happens - the property market will always come good.

Growth in UK property values as well as in Clapham seems fated to slow over the next five to ten years, whatever sort of Brexit takes place.

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First time buyers are still buying! What does this mean for the Clapham Property Market in the long run?

Excellent news - the first time buyer market is staying strong, and growing ever more. The National Association of Estate Agents has reported that first time buyers accounted for nearly a third (32%) of all purchases in October - the highest since they started logging this data back in the year 2000.

But what does that mean?

In a nutshell, it's great news! The continued demand from first time buyers will mean that properties at the lower end of the spectrum (starter homes - one and two bedroom flats, anything up to £500k) - will continue to rise in value sharply. A good proportion of these will be former starter homes belonging to now "accidental landlords" (those that couldn't sell at the time so reluctantly held) or couples who perhaps were able to trade up using the old "let to buy" system (letting out their flat whilst remortgaging to release equity for a deposit for the next property). A lot of these non-professional landlords will be selling up due to tax changes, increased regulation and increasing costs in the PRS, making the money made every month (probably not more than a few hundred pounds, dwindling to nothing after a few repairs and a void) not worth their time.

So what happens next?

There are, in my opinion three or four stages to a London purchaser's life. Naturally this is wildly generalised of course, but here is my take:

1. First time buyer, purchases small one or two bedroom flat (50-60sqm)

2. Trades up to bigger flat or even house, perhaps due to growing family (95-110sqm)

2a. Extends existing home

3. Trades up again or 

4. Downsizes or leaves London for better value

We now find ourselves in a market where any property £950k plus is disproportionately more expensive due to the increase in stamp duty - a £million purchase would now set you back 73k in SDLT, prior 1/4/2016 this was 30k cheaper. As a result we've seen sales in this segment of the market dwindle some 10-15% depending on which tracker you look at. More people in that segment are therefore staying put; they are finding it difficult to sell. So the top end staying stagnant means that buyers that would have been (3) above now revert to either 2a or 4, skipping a trade up to a nice house in Old Town (but let's face it £1,000,000) can be paid quite easily outside of Old Town too these days).

Let's go back to the bottom of the market. The lion's share of the stock that first time buyers are purchasing right now is stock being offloaded by aforementioned small-time investors, for whatever reason. An equilibrium of supply and demand? Perhaps not because prices are still rising, and pretty sharpish too! A year ago you could find a decent 1bed apartment in Clapham North/Brixton for £400-450k, now you're talking £450-500k for the same thing. For a "woe is Britain, the market is rubbish" market, that's a pretty sharp increase! So not so rubbish after all, FTBs galore chasing limited stock, prices going up. Simple Keynesian economics. I predict that, over time, small-time landlords that haven't sold up yet may do so when they realise their tax bill will increase substantially, further feeding the demand at the bottom of the ladder. However the problem is this: people at the (3) stage, so looking to buy a bigger property than they have, don't move as often, or as quickly. They take a lot more time to deliberate a move. There may be children involved, commutes to important jobs - they are older and therefore have more specific requirements. What they want may not be readily available on the market. So they wait. Patiently. After all they are not in a hurry to move, they are comfortable where they are, they are homeowners, their property is going up in value whilst they wait. Unlike the FTB they are not "wasting" money by paying a landlord's mortgage. So this piece of the pie is very slow. That will cause surge in demand a few years down the line ones all these new first time buyers want to trade up! I predict second properties will be in short supply, leading to a surge in prices. I would like to say the same for the bottom of the market, but I think the slow and phased taxation change will mean that landlords selling off will be gradual over time, drip feeding the supply to the pit of hungry first time buyers. There is no material change on the horizon that would incentivise the middle of the market to move. Instead the stamp duty higher up the ladder means that it is much better value to extend and stay put.

What can we learn from this?

I predict there will be a sudden surge in demand for these (middle of the market) homes  in 2018-2020 when this surge of first time buyers decides they have outgrown their properties and want to trade up. If the stamp duty costs in the upper end of the market have not come down by then, we may well see a mass exodus of young families out of Clapham (and this theory can be applied to the rest of zone 2 also of course). Either those that have extended and want a change of scenery, or more truthful you may even get the first time buyers of today moving out because by 2020 I'd be surprised if you could buy a three bedroom terraced house in SW4 for under £1,000,000! The upper end of the market may well stay stagnant for a few years yet until earning power and deposits have caught up. Stamp duty cannot be financed, it needs to be paid like the deposit, it must be money in the bank. 

So what does that mean for investment in Clapham?

I feel that there is reasoned argument to deduce that the demand for bigger properties will surge in the next few years. You may be wise now to look at bigger as opposed to smaller units, both for yield (higher rental income per £ spent on purchase) and in the long run, for capital appreciation. I can say from personal and professional experience that 3 bedroom apartments and houses have done well. Whether you buy for yield or capital appreciation both Victorian and old Local Authority units do remarkably well. There is however, more incentive than ever for first time buyers to get on the housing ladder, and with the government's continued attack on the property investor you are sure to see good capital appreciation from a desirable 1 bedroom apartment too, especially Victorian ones. As aforementioned you'd be pressed to find a good one now for under £450k on a desirable road near a tube - just be aware that due to lending tightening up (because of the tax changes) you will find that it will be nigh on impossible to leverage a period property over 70%LTV, normally you'll find you can't get beyond 60-65% due to these stress tests (the lender will simulate the interest rate at 5% and then insist the rent is 1.45 times the rental income).

I have helped many investor landlords build profitable portfolios. If you  are interested in learning more about growing your investments wisely then do get in touch. I offer a range of investment options to help you invest - either by helping you purchase property or by helping you fund sustainably profitable property developments. It can be as hands-off or hands-on as you like. Get in touch by emailing me: jeroen@claphampropertyblog.com or come down to a meet in Clapham (Clapham Property Meet) and learn more about getting the best returns in the London property market.

Is this the Trump card for investors in Clapham?

Wow what a year it's been. We've had so many changes on the playing field (property market), stamp duty, increased taxation, more regulations, Brexit, and now.... TRUMP! But what will the last change mean for homeowners and investors in South London?

Let's go over a few factors which will influence the housing market, be it purchasing or rental demand:

Immigration - Trump has been rather outspoken on his immigration views; practically wanting to stop Muslim immigrants at the border and deport Mexicans en masse. Result, lower demand in the lower end of the market, but increasing domestic wages.

Inflation - This will go up if imports are reduced and Americans are forced to spend more on goods produced locally rather than manufactured for less in the Far East.

Taxes - Trump promises to cut taxes in general, especially for corporations, thus increasing rewards for entrepreneurs domestically.

Markets always react to change. Normally investors head for cover, which is no different today. Gold prices are up, and the Dollar price is down today vs the Pound, but Wall street is reported to be surprisingly calm.  No knee jerks really. This is probably also due to the fact that Trump won't take office for another two months.

In a recent interview with City A.M. some big investors warned that "knee-jerk reactions won't get us anywhere." Sounds like Brexit all over again! But what does this have to do with the UK? Well, the housing market is only a small part of the country's macro economy. Ultimately the housing market is linked with investor confidence. When the public is confident and we are in an environment of political stability, prices continue to rise (however inflation going up will be a good thing for homeowners, their house prices will be linked to inflation to an extent).

I am confident that despite there being change in recent times, the USA and the UK are still in a politically stable environment. Civil unrest isn't on the cards, is it? Yes there will be changes, but if there's one thing that Trump does have, it's business acumen. My statement will be debateable I'm sure, but as mentioned I don't think that "unrest" is a way to describe the US/UK climate, be it political or economical.

I am a career property property professional and I have built portfolios for many clients. If you are interested in investing your money in the London property market then I can help you get the best returns so that you needn't worry about risking your capital. I offer a range of investment options such as portfolio building for high yield and maximum capital appreciation with hands-off management (armchair investing) or opportunities to invest your money into refurbishment projects for relatively quick returns on your capital. If you are interested in working with me do get in touch on jeroen@claphampropertyblog.com or come down to the Clapham Property Meet and learn more about investing in the London property market.

Overseas buyers active in Central London - does this mean you should be buying in Clapham too?

I came across this article the other day: Huge spike in Chinese property investors' interest in the UK post-Brexit. I think without clicking on the link you can get the jist of it. In essence the drop in value of the GBP has made property in London 10% cheaper overnight. Before the Brexit results 1 GBP bought you 9.8CNY. Today that same pound is only worth 8.8CNY. A nice discount if your money is in China and you happen to be in the market for a flat in the UK/London.

As I predicted in my previous articles, the weaker pound has indeed sparked mass interest from overseas. This is great news! Normally whatever happens in (Prime) Central London will have a ripple effect on the rest of the capital, so you can see more activity in zones 2, 3 and beyond in the next few months. People keep asking me whether Brexit has been detrimental to the market and truth be told it may have been, but combine it with other factors like the summer holidays (it's normally very quiet in the sales market this time of year) and the effects have been minimal if any. Once everyone comes back from summer holidays I trust it will be business as usual, with a stronger comeback due to increased numbers of foreign buyers.

I foresee that with £millions of foreign investment we will end the financial year on some significant capital appreciation. If you are after an investment property it probably is a good time to capitalise on seller's willingness to "do a deal" in order to move on as opposed to wager with uncertainty. Sadly for UK buyers their pound doesn't necessarily stretch 10% further, but nonetheless I do feel that now is a good time to buy - there are sellers out there looking to sell, summer holidays or not.

I've had a number of clients ask me as to whether they should hold off buying, and my answer has always been a resounding "no." Now is the time to buy, whether you're looking to add value or simply hold and rent it - rents are set to go up over the next few years, so if you are able to secure a good property at a good price this will pay dividends. If you are looking to sell on, the first time buyer market is still doing very well. Cater to that market and you cannot fail.

If you are looking to expand your portfolio or get into property investing, be it full time to replace your income or you just have some spare money to invest and you want to do this as a worthwhile investment strategy instead of getting 1% interest in the bank then reach out to me on jeroen@claphampropertyblog.com and let me tell you how to make the most from your assets.

Will the confidence continue in the Clapham Property Market?

I was interviewed by Brendan Quinn recently for his podcast and my sentiment is clear. The market is still strong and there is no holding back the buyers at recent auctions (auctions are always a good indicator of investor sentiment). So much so that some sellers have been upping their reserves to a level that could not be met. I think the days of achieving 50% over the guide are gone, so auctioneers are wise to set the reserves competitively and let the buyers decide the price. I note that some London auctions have had a fair few unsold where the expectations were too high; I believe this is due to a shift in demand for certain types of properties.

Click here to listen to the podcast

I had carried out due diligence for several clients on recent lots and they decided not to buy at the prices that they were going for as it didn't fit in with their particular strategy (buy to sell). Judging by the fact that the properties still sold they certainly were fit for those opting for a longer term strategy. Those buyers are clearly seeing these properties as hold and rent opportunities. They are buying more with yield in their sights than instant capital appreciation by adding value. Is this a better strategy?

It's certainly one to consider. Buy to Let is not a new phenomenon of course, and has done very well over the years, I can say this from personal experience and that of many of my clients. A caveat however is that more money is invested per property, perhaps limiting the number of properties an investor can buy - normally an investor will look to leverage to buy as many as they can, but if they are unable to "finance out," that is, lend on the increase in value they have created it will ultimately slow the market down; they can't buy as frequently/as many properties, so they will be just collecting rents until the time is right. On the plus side they will be better cushioned to rate rises, small market dips and voids should they be unable to find tenants for some reason. Not unwise.

As per my previous blog posts and many talks I have had recently I predict that London will see very high rent rises over the next few years due to the increased taxation on residential landlords - so perhaps a long term view is the right one?

I am not alone in thinking that rents will rise substantially over the next few years. The Tax Payers Alliance (formed to campaign against the recent changes in taxation for residential landlords) seems to agree. For the full article from the Tax Payers Alliance click here.

So if you are looking to invest in property with a view to buy, add value and resell, perhaps it's time to rethink? There are certainly still opportunities out there however so if you are aiming for the first time buyer market I feel you are nearly guaranteed to do well (and others agree judging by a recent article in the Property Reporter), providing you can find the properties at the right price. If you are considering a longer term strategy and a longer cycle per property - the market is looking good for landlords at the moment, and with further rent rises to come it would be worth considering more letting stock in your portfolio. If you are looking to make the most of your property investment why not drop me a line and start a dialogue? I'm on jeroen@claphampropertyblog.com.

PS I will be hosting an investor evening in Clapham in September - an ideal time to meet in person - so do keep your eyes peeled for more details with date, venue and guest speaker lineup.

How has the Brexit referendum affected your property in Clapham, Brixton & Surrounds?

Well it's been an exciting weekend, what with the fallout of various political parties due to the (to some surprising) results of the UK's referendum.

The journalists, as usual, are doing an outstanding job of reporting mass chaos. The dropping pound, crashing house prices (some predicted 20% drops) and all time low consumer confidence. That's all good and well, but personally I think it's a bit soon to make such wild predictions (ahem - assumptions) over one single weekend right after the referendum results.

Many a property investor, myself included, have already come out and spoke of the opportunity these times represent. Let's look at what's happening, and my thoughts on the short-medium term. Naturally as with any of these predictions, it's only my view as a property person with nearly 15 years of experience in the South London property market. I don't have a crystal ball, but here is my 2p worth:

1. The pound has dropped in value.
   This will actually help property prices in Prime Central London - a weaker pound means it's cheaper for wealthy foreigners to buy luxury flats. Ultimately the rest of London will benefit from this confidence (think ripple effect).
   
   
2. Another reason for accidental and small landlords to sell up.
   Increasing red tape in the past 18 months or so, combine with the reduction of mortgage interest being fully deductible from rental profits has already caused a few smaller landlords to think twice, choosing for "easier" investments. The uncertainty (in future capital gains) will certainly make up their mind to sell straight away if they aren't already. We'll see a lot more smaller, more affordable units coming to market, creating more supply.
   
   
3. First time buyers will see value and buy.
   Speaking to many of my estate agent colleagues up and down the country this morning I can assure you the mood is good - deals that have been agreed are certainly staying agreed. There are no signs yet of knee-jerk reactions. Goes to show that today's first time buyers will still be better off paying a mortgage as opposed to rent, as well as working to a long-term appreciation in their asset. Smaller landlords in my second point above will have already enjoyed medium-long term appreciation so they don't want a short term dip to eat into their total gains. Long term view buyers such as landlords will take the same view, although they may sit out for a month until the dust settles.
   
   
4. Savvy investors that "buy to sell" will focus on smaller units in order to satisfy demand from the FTBs in point 3 above.
   I make no secret about it, it's a market segment that keeps on giving. Some property investors love luxury flats in superb locations, but First Time Buyers are often overlooked. What are their needs, what are their wants? Property investors focusing on the average buyer who wants a touch of luxury without paying through the nose will do well.

So there you have it. In essence I think the momentum the property market has gathered over the last few years will remain, but there will be different players in the property game. What are your thoughts? Share in the comments below.

If you are looking for a portfolio review, or perhaps you are looking for advice to make your investments (current and future) yield better results then contact me on jeroen@claphampropertyblog.com. I help investors like you make better returns on their investment. I have done so for over a decade, with proven results. If you are interested in taking the next step on your investment adventure then reach out and I will expertly guide you through the process. I am actively looking for clients to invest with and for to expand the current successful portfolio.