On Friday 24 June 2016, share prices in housebuilders fell dramatically as a result of the UK voting to leave the EU the previous day. However, over the past 2½ years, the residential development market has remained remarkably buoyant with the industry adopting a “business as usual” attitude, notwithstanding the political uncertainty.
Perhaps the reason for the resilience shown in the sector is because Brexit does not change the underlying condition. There is a housing shortage in the UK, with year on year under supply that the Government, in its 2017 manifesto, promised to address.
Neither does there appear to be any significant change in government policy on housing in a post Brexit world. The Ministry of Housing, Communities and Local Government single departmental plan issued in May 2018 sets out Government intention to increase housing supply to “deliver 300,000 net additional homes a year on average”. It is however, recognised by Government that the majority of new house building will be carried out by the private sector. On that basis, the economic uncertainty that Brexit poses to those private developers, and their funders, cannot be underestimated.
The industry also has to remain in touch with its consumer market. If consumer confidence is low, due to the threat of job losses, tax rises and higher priced goods and services, house prices could stagnate or fall. Indeed, latest figures from the Office of National Statistics and Land Registry show a fall in the UK average house price of 0.1%. The picture is by no means straight forward however, with significant regional variances, and the possibility of problems with affordability in the South East could be an equally likely cause of falling prices in that region.
In the next few months, house builders and land promoters may delay development land deals, adopting a “wait and see” approach as to what Brexit might actually look like, and how this will affect consumer confidence. However, any delays could be relatively short term, particularly if a deal is agreed between the UK Government and EU before 29 March 2019, and the current uncertainty surrounding Brexit removed.
In the longer term, the Brexit legacy will mean that the industry will have to address potentially higher costs of materials, depending on the terms of any EU future trade deal; the impact of changes to UK immigration laws, and how this will affect the workforce, as well as the housing requirements of the population; inflation and potential interest rate rises, which may affect the ability to raise finance; and the inability to obtain funding from the European Investment Bank in relation to affordable housing projects.