Downing St & Out: Our economy needs a decision and someone to make it

Posted on Friday, June 7, 2019

Updated on

As PM May officially steps down as Tory leader and candidates jostle for position, former financier turned agency boss Charles Curran explains the impact that current political events are having on the market…

The fact remains that any new Prime Minister is going to face the same parliamentary arithmetic that brought down Theresa May.

The only way to change that would be to call a general election, however this would be ill-advised. At the same time there is no appetite for a ‘no deal’ across many parties in parliament and any attempt to push this through could well lead to a vote of no confidence (all would unite against the Tories for this including some of their own members), resulting again in a General Election.

For a property standpoint, no deal is not in the nation’s best interests.

Any new leader has to be mindful of the arithmetic. Mr Johnson is the de facto front runner. He is not a conviction politician and really does not want his Premiership to be two years of log-jam followed by an election defeat.  His strategy may be to seek a new mandate via a binary referendum of Remain or Leave with No Deal (absolving him of the ills of Prime minister May’s failed negotiations with the House – irrespective of the result he would have political cover to protect his legacy. A second Referendum would free him from  negotiating with the EU and getting on with the day to day running of the country. Avoiding the cowpat that Mrs May jumped into seems like sensible politics…

So how would this affect our market. Firstly, I would surmise that the appetite for a No-Deal Brexit will wane. In a ‘No Deal’ scenario, over the next three to five years, Sterling would lose ground to other currencies increasing the cost of imports, leading to an increase in the cost of goods but this would be countered by a rate hike from the Bank of England or inflation would gather pace quickly.

A hike would increase the cost of borrowing for companies, which would reduce their free cash flow. A hike would also increase the cost of our exports and reduce cash in the pockets of consumer so sales would also suffer, reducing the need to keep inventory stock at current levels. An economic slowdown has been accepted by almost all players as a consequence of ‘No Deal’ which will inevitably lead to redundancies. Taxes and or borrowings are likely to increase as a consequence. The inevitable increase in rates will affect mortgage holders on standard variable rate contracts.

Buy to let mortgages will also increase substantially and if so, rents will go up to cover the cost (mortgage interest rate relief entering its next phase next year). For a property standpoint, no deal is not in the Nation’s best interests – it reduces the number of applicants as it increases mortgage costs and day to day living expenses reducing the amount of deposit that can be raised.  In the medium to long term, we may well do better outside the EU but who knows – and that is quite a gamble for an economy.

As Mr Johnson tumbles to the podium it would seem astute to garner some political cover with a second referendum. I cannot see why the arithmetic would change in parliament without an election – these EU elections have polarized the country again. A second referendum would silence the Remainers; if they lost there really would be no argument and if they won, we would see a boost in the economy, inward investment; and most importantly for buyers and sellers of property with a new found sense of confidence, will look to commit to one of the largest transactions of their lives.

From the property coal face…

We have had a very good five months, sales being up over 100% YOY with more in the pipeline, although we’d like more stock to meet the demand from our applicants. Buyers are half domestic and half foreign but again many from the USA where the weakening pound and the removal of state property tax deduction against federal income tax (it is now capped) makes us look cheap for second homes.

Our sold prices are a touch below or marketing price – last year we averaged 4%, for the past five months it has been nearer 7%. The political threat causing some vendors to just get on with selling. We understand that there is quite a pent-up pipeline of stock waiting for political calm before coming to market.  This strategy may not deliver the higher prices these vendors are hoping for. A large amount of stock coming to the market will maintain current pricing or even possibly lower it. There is no real pent up buying demand so no reason to delay a sale.

A large amount of stock coming to the market will maintain current pricing or even possibly lower it

In prime lettings, we have seen a year-on-year increase in both rents achieved and the number of lets we have done – a portfolio average 46% increase in rents achieved. We have taken on higher value stock so the like for like increase on our stock from last year is about 14%YOY and a 17% increase in properties let.

The story here is that fewer are buying or tying up their capital in light of political uncertainty. SDLT is also still a hard pill to swallow but politics is driving the rental market