The unthinkable has happened, and British voters opted to leave the EU. This was a surprise for most experts: financial markets were counting on an ‘In’ result, and bookmakers had the odds of ‘In’ prevailing at around two-thirds. But what now? And what does that mean for UK property?
Contrary to initial forecasts, prices had remained broadly stable in the face of uncertainty leading up to the vote. Rightmove reports that prices rose 0.8% in May nationwide, and only dropped marginally in London, which has been the hottest and most international market.
Even by the standards of those who were relatively optimistic, the market had been doing very well. So it is possible that there will now be somewhat of a backlash.
Now, the building restrictions holding back property supply in the UK continue in place, and Britons will still need a place to live, so some of the fundamentals of the strong property market are still in place.
On the other hand, if Brexit does cause jobs to dry up in London, especially in the high-paying financial sector, you can expect the prices there, which are already eye-watering by the standards of a healthy economy, to come under pressure. And property in other cities is also not immune to a nation-wide recession or to drops in demand as immigration declines.
Finally, as the saying attributed to Baron Rothschild goes: “Buy property when there is blood on the streets”. So now could be the time to keep your eyes open.
So what should you be looking at?
First, let’s recap the recent stamp duty hike. Because of the rise in buy-to-let, and in an attempt to mitigate soaring property prices that keep first-time buyers off the ladder, the government introduced a 3% stamp-duty surcharge on second properties.
By the way, this applies even if your ‘first’ property is overseas. So if you’re buying something in the £125,000-250,000 range you’ll be paying 5% instead of 2%, and if you’re buying in the £250,000-925,000 range you’ll have to pay 8% rather than 5%.
More expensive properties always commanded higher rates, and in theory rental markets should eventually adjust and build in the higher taxes into higher yields, but in practice, if you’re focused on investment returns, this gives you a hint that you might want to look at properties on the lower end of the price range.
That’s especially the case given that it’s the scarcity of these lower-range properties that is driving up prices overall.
In terms of geography, we discussed UK markets here a few months ago, and there haven’t been any structural changes.
To recap: by international standards, the UK is a fairly expensive market (as compared to incomes, for example), and London has been priced to a point where rental yields aren’t all that attractive (below 4%). Given that it is possible London may lose some of its appeal to international buyers, for investors it is now a less-attractive market.
So it makes sense to look at some secondary markets such as:
- The Southeast. Here the diameter of the commuter area around London is continually increasing as properties closer to the city become unaffordable. This drives property prices higher further away. So despite a relatively modest 4% rental yield, total returns (including price increases) in this region have been almost 15% according to the Telegraph.
- Secondary cities in the Midlands, where yields reach 5.8%
- Secondary cities in the North-West, where yields are 6.7%, but where overall long-term property price growth is potentially not quite as high.
- Scotland, whose population voted to remain in the EU and whose First Minister has vowed to fight to keep it in the EU, whatever it takes, could conceivably shoot to prominence. Companies that want to remain in the EU but would like to maintain an English-speaking workforce and familiar tax, legal and labour systems may well opt for Edinburgh or Glasgow over Paris or Berlin as their European capital.
Regions that have struggled seriously with growth, such as the Northeast, or otherwise lack major cities or economic activity, often have even higher rental yields, but at the expense of fewer prospects for sustained price growth.
Apart from the behaviour of the real-estate market itself, it’s also important to remember that Sterling has dropped about 15% as a result of Brexit. So from the perspective of an international buyer, property is now significantly more accessible.
How to get a mortgage as an expat
Historically, obtaining a mortgage as an expat has been somewhat more challenging than locally, but firms specialized in catering to overseas professionals (such as Skipton) have popped up over time, and traditional generalist firms and banks (such as HSBC) also do try to tap into this attractive market.
For a £200k property you’ll typically need a minimum income of around £40k.
Overseas income is taken into consideration, but if you are paid in foreign currency they might expect a higher minimum income than if you are paid in Pounds.
As usual for buy-to-let, rental cover of 125% of the mortgage payments is expected, and deposits are around 25-40%, depending on your credit and the rate you are going for. Arrangement fees are in the £200 – 2,000 range, and rates range from 3-4% APR.
In conclusion, now could still be a good time to invest in the UK market: the drivers of price growth continue to be in place and yields are attractive vs. mortgage rates and vs. investment alternatives in financial markets.
The scenario is more turbulent than it would be without Brexit, but for those with a long-term view, now could be the time to move.