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Populations Boom, Building Levels and Brexit Update

PropertyInvesting.net team

No  Crash Yet: The doom-mongers have been forecasting a crash in London property prices for about six years now, and it has not happened. The Referendum vote for Brexit on 23 June this year further strengthened the chorus call for a crash and again it has not happened. We provide some analysis on why this is.

High Birth Rate in London: One of the main reason for robust London property prices is that London’s population forecast to reach 9.8 million by 2025 due to overseas arrivals and high birth rate (figures from the Office of National Statistics). New arrivals to London have offset the high numbers leaving the city for other countries and the rest of the UK. The population of London grew at twice the rate of the UK as a whole between 2011 and 2015. London’s population is likely to reach almost 10 million by the middle of the next decade.

Population Boom: In mid-2011, the population of the city stood at 8.2 million - over four years it increased by 469,000 to just under 8.7 million. The arrival of 200,000 people from overseas each year, and an average of 130,000 births a year drove the city’s growth, and offset the high numbers leaving the city for other countries and the rest of the UK. This corresponded to London’s population increasing by 5.7% between mid-2011 and mid-2015, compared with growth of 2.9% for the UK as a whole. During this time, London property prices rocketed by 47% between June and 2011 and June 2015, from £285,906 to £419,474. From mid-2011 and mid-2015, after Greater London, Bristol is the city with the large population rise of 4.5%, or 49,000, to 1.1 million.

Net Migration: In London an average of 192,000 people came in each year from abroad – including Britons who have returned after a period living overseas – while 95,000 moved in the other direction. Net international migration to Greater London averaged 97,000 a year, out of a figure of 236,000 for the UK as a whole. There were an average 130,000 births in the capital each year and just 48,000 deaths.

Age Profile: Each year 63,200 people left the capital, with the 22- to 29-year-old age group the only one where more people moved in. Among 30- to 44-year-olds, 33,600 more people moved out of Greater London than into the city each year, while among children that figure was 31,700.

Bristol Boom: As an aside, Bristol saw more people move in from around the UK, with net internal migration averaging 3,700 a year between mid-2011 and mid-2015. The population of Edinburgh was also boosted by internal migration, with 2,700 more people moving into the Scottish capital than out. House prices in those cities have also increased.

Population projection: The population of Greater London is projected to grow by 12.7% between 2015 and 2025, to 9.8 million people. In the UK, the biggest projected increase is among those aged 65 and over, where the population is expected to grow by 21%. In London, this age group is projected to grow by a quarter over the decade.

Supply shortage: Meanwhile the number of London homes had grown by only 3.5% between March 2011 and March 2015. For a population increase of 192,000 a year, about 95,000 new homes are required to keep pace with this growth. However, only about 25,000 London homes are being built each year and this is set to dramatically drop to more like 15,000 in 2017 off the back of reduced confidence after the Brexit vote. The level of net immigration is not likely to reduce in the next three year – and there is even an argument it may increase as people try and beat the deal deadline before it gets more difficult to move in and gain residency.

Building Application Crash: It’s worth noting the level of new building applications crashed to 25% of the rate achieved just prior to the Referendum. This is a pretty good leading indicator pointing to dramatically lower building levels in 2017.

Luxury Flats: It’s also worth pointing out that the bulk of the new homes being built in London are luxury apartments, many along the river, that sell for sums in excess of £1 million. These homes are often snapped up by foreign buyers and many are not lived in all year around. Hence the little home building taking place is not exactly helping the housing shortages for mid and lower wage earners. Almost no houses are being build in London.

Buy-To-Let Tax: The draconian taxes on private buy-to-let businesses is also hindering building supply as many of these people would be purchasing new builds, and the market for such properties will now soften in London because of the tax treatment on property as a business. This will further exacerbate the already chronic housing crisis in London.

Stamp Duty: The 3% stamp duty on second homes is also likely to hinder building since it makes it more risky for property developers to sell properties since the government is taxing the building of these properties. This will further exacerbate the chronic housing crisis.

Sterling Decline: Some people have mooted that Brexit will cause London property prices to come crashing down. So far if anything it has had the opposite effect. As an example, Chelsea and Kensington house prices were dropping just prior to the Brexit vote, but they are now rising. The reason is that Sterling’s value has declined by 20% which make these properties 20% less expensive compared in dollar or Euro terms – for foreign buyers. The Chinese in particularly are seeing prime central London property prices at arguably bargain levels – and are supporting the house price growth. In addition, the interest rates dropped by 0.25% which made borrowing cheaper – which also supported property prices immediately after the Referendum result. That’s not to say of course that all the financial uncertainty might not cause prices to drop in 2017 in the Prime London property market, but for now, the latest numbers from Rightmove suggest accelerating house price growth like we normally get in September after the quieter summer season – business as usual.

London Property Shortage Worsens: The key point to make it that its far more difficult for property prices to come crashing down if the population is booming, employment stays robust and there is a chronic shortage of properties. This trend is nothing new, it’s something we have been warning about now for 11 years. The seeds were sown 15 years ago when building levels dropped whilst the London economy boomed – and Tony Blair’s government opened the flood gates for migration from EU countries and overseas countries – in part to boost growth. This was of course continued by successive governments and looks unlikely to slow any time soon.

Financial Services: Longer term, the financial services sector in London is likely to slow significantly in view of the Brexit negotiations – the outcome of which is likely to be quite negative for business as a whole in the next 1-5 year timeframe. There will be many stories of bank staff either positioning to leave London or actually leaving London. Some banking staff will be coming in the other direction. Car manufacturers will threaten to move to mainland Europe despite the drop in Sterling.

Bad Deal for UK is Good Deal for EU: Beyond doubt the 27 member states of the European Union will collectively want to punish the UK for leaving the EU largely because this will frighten other countries that are thinking about having a Referendum. With a Russian military threat increasing on Europe’s eastern fringes, states like Poland and Slovakia will want the whole European project to stay together. What Brexit is about is a long term directional shift to taking back control of laws, courts and regulations from Brussels back to London, and gaining more control over our borders. The optimists will say economically it will improve the UK’s situation in the long term, the pessimists and central liberals will be convinced it will destroy our once stable economy and lead to years of stagnation.

Net Deficit: What the UK has going for it in the negotiations is that it imports more from the EU than it exports, so Europe needs a good trade deal with the UK. Also the UK population is growing at a healthy pace and the population is relatively young compared to most European countries. If everything was normalised to population growth and age, the UK should be growing at about 1% higher levels than mainland Europe in normal circumstances, but we will probably find it slows down to about the same pace as Europe for the next few years despite its better demographics, because of the negative economic impact of Brexit.

Non European Care Less About Brexit: Longer term, people in the Middle East, China, Africa, Southern and North America will still view the UK as a good place to invest in property in London, and Sterling’s decline will make it more affordable for them – they will be less “hung-up” about Brexit than Europeans/the British.

Economic Empire Building: One could argue all empires come to an end. The British Empire started to collapse after Word War I – and the European Union centralist economic empire – focussed in Brussels and the Franco-German axis will probably collapse in due course. All non-elected so called democratic empires do eventually collapse. When the UK signed up to the Common Market it never envisaged Brussels making European Laws that would tell the UK what to do – the level of integration will only increase and many British people think “enough is enough” – and it’s time to get out because it will only get worse. Cameron tried to get an improvement from Brussel and came back with nothing.  Others are poorer disaffected people that have seen their lot in life worsen, and the referendum was a protest vote against the ruling European elite – also the Westminster elite. If we see Norway and Switzerland as examples of countries that operate very successfully outside the EU – it’s not for certain that Brexit will be a bad think in a 5-10 year timeframe.

What seems almost certain though is that the next 1-3 years will be depressingly uncertain and a huge distraction for politicians and businesses – and it will feel like the country has “shot itself in the foot” for most people. There is unlikely to be a second referendum on the outcome of “the deal” post article 50 trigger, but there still could be a vote in parliament on the deal. And it’s not certain the deal would gain a winning vote in favour of accepting it. All very complicated, uncertain, time-consuming and great if you are a newspaper trying to sell papers – the news headlines will go on for years. But no good if you are in business like most people. Taxes are paid by the private sector, that pays for the government and public sector. The politicians gave the people a chance to decide something – they spoke – it was a close call – and now business are scared like crazy and tax receipts will drop worsening the deficit because of a forecast bad trade deals, uncertain investment climate and political wrangling  and rhetoric.

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