What does a hung parliament mean for property?

On Friday 9th June 2017, the UK woke to the surprise of a hung Parliament, as Prime Minister Theresa May’s decision to call a snap general election backfired. The Conservative Party won 318 seats, down 12 from the previous general election. The Labour Party, meanwhile, won 261 seats, up 29.

The surge in support for Jeremy Corbyn’s party, coupled with the fall in support for May’s Brexit government, was fuelled by a historically high turnout in young voters and resulted in no party holding enough seats to form a majority government. With the largest number of seats, May announced that the Conservative Party would form a minority government, using support from the Democratic Unionist Party to bolster its presence in the House of Commons.

May spoke of the need to “provide certainty”. Indeed, the general election arrives as the UK prepares to enter negotiations with the European Union for its exit from the EU, following last year’s Brexit referendum. While housing markets often continue with business as normal regardless of elections, unless they bring about relevant policy shifts, does the prospect of Brexit on the horizon mean that there could be a bigger impact than normal from 2017’s election upon real estate? What does a hung parliament mean for UK property?

We round up the industry reactions to the result, as well as the Queen’s Speech, delivered by May on 21st June.

Landlords

With all three main parties pledging to implement a ban on letting agent fees for tenants, the 2017 general election was not an ideal one for landlords, with no plans announced to reverse the buy-to-let policies introduced by the Conservative government in the last two years.

The Queen’s Speech on 21st June confirmed that a new bill will be brought forward to ban landlords and agents charging letting fees. The Tenants’ Fees Bill will enforce the ban, giving tenants the ability to recovery unlawful fees.

David Cox, Chief Executive, ARLA Propertymark comments: “The announcement of the draft Tenants’ Fees Bill today was disappointing. It’s unlikely the Government had enough time to analyse all of the responses from the consultation, as it only closed 12 working days ago, on the 2nd June. It appears they had already made their decision and therefore the consultation was no more than a ‘tick box’ exercise and they haven’t appropriately taken the industry’s views into account.

“A ban on letting agent fees will cost the sector jobs, make buy-to-let investment even less attractive, and ultimately result in the costs being passed on to tenants. Research conducted by Capital Economics for ARLA Propertymark1 earlier this year shows that referencing checks undertaken by agents take, on average, eight hours to complete. It is therefore right and proportionate that the industry is recompensed for this work, which benefits tenants. The research also showed that letting agents stand to lose around £200 million in turnover, costing the sector 4,000 jobs. Landlords themselves would lose £300 million, meaning they may seek to cover their losses by increasing rents to tenants.

“On average, rent costs will go up by £103 per tenant, per year, ultimately meaning tenants who move more frequently will reap savings on their overall costs but longer term tenants, who are usually lower income families, will see a loss as their rents rise year-on-year.”

The Queen’s Speech also announced that tenancy deposits will be capped at no more than one month’s rent, as part of the new bill.

Richard Lambert, CEO at the National Landlords Association (NLA), says: “The decision to cap tenancy deposits at no more than one month’s rent smacks of a political gesture from a government desperate to court the voters who supported their opponents at the last general election. We estimate that around 40 per cent of deposits exceed one month’s rent. While capping them may reduce the move-in costs for some, it will increase the temptation for others to view the deposit as the last month’s rent, leaving landlords out of pocket at the end of the tenancy if, for example, the property has been damaged. Some landlords use a higher deposit to give them the extra confidence they need when letting to higher risk tenants, so this could also have the unintended consequence of deterring them from offering their property to those likely to be struggling with affordability in the first place.”

Construction to slow?

Industry experts expect construction to slow slightly in the wake of the result. Founder and CEO of eMoov.co.uk, Russell Quirk, notes that the UK will now have its sixth Housing Minister in almost as many years, after Gavin Barwell lost his seat in the election.

“I suspect that the housing brief will take a back seat now, despite politicians’ promises in recent weeks, given the combined weight of negotiating Brexit, stabilising our economy, button-holing political support across the aisle on every vote and, inevitably, campaigning again for the next poll,” he comments.

“The outcome of the Housing White Paper, which was planned for release in the Autumn Budget, will potentially be delayed,” adds Liam Bailey, Global Head of Research, Knight Frank.

However, Bailey argues that the “general pro-development policy bias is likely to remain in place”. Indeed, there has already been an existing slowdown in housing starts, which was already forecast to lead to a period of fewer completions in the near future.

“With the Conservative party forming a government with the DUP and operating under a minority arrangement, political uncertainty will continue in the coming weeks and months ahead, particularly as Theresa May is being pressurised to resign. There are many questions which have arisen, including whether the UK will now negotiate a hard Brexit and which housing policies will be pursued under this new ‘confidence and Supply’ arrangement with the DUP,” comments Martin Bikhit, Managing Director of London agency Kay & Co.

“We anticipate that the Conservative pledge to build a million new homes by the end of 2020, with an extra 50,000 by the end of 2022 will remain a focus for the government. House-building targets like this have proved notoriously hard to meet in the past, but the government plans to facilitate more building on brown land and to work with local councils to draw up schemes for more social housing.”

A softer Brexit?

While the diminished Conservative presence in parliament could lead to much political uncertainty, and potentially another general election in the near future, there are positives to be taken from this morning’s result, reminds James Roberts, Chief Economist at Knight Frank.

One of those positives is Brexit, which is now potentially on course for gentler, more trade- and expat-friendly talks.

“The government will probably need the support of several other parties, not just the DUP, to get any future Brexit deal through Parliament, in order to off-set any Tory backbench rebellions. Consequently, the pendulum has swung against Hard Brexit, as a compromise deal will have the best chance of commanding broad support in the House of Commons,” explains Roberts.

“Also, on a day-to-day basis the next government will be restricted to putting consensual, not controversial, policies through Parliament. This probably rules out any more populist taxes on property, or increases in business regulation.”

Buying and selling

Regional cities in the UK have been the best performing in the last year, as the Northern Powerhouse economies have grown, demand for property has risen and house prices have been pushed higher.

Andy Foote, sales director at Seven Capital, predicts that this trend should continue, regardless of the election result.

“Following the EU referendum, we saw a slight pause as the market digested the immediate impact of the decision. Arguably, this is a less seismic shift than the decision to leave the EU,” he comments.

“While the London market may be more sensitive to a change in central government, for the short term, growth markets will remain robust and resilient, delivering capital growth for investors. Despite the change in government, the imbalance of supply and demand in the UK property market still persists.

“The cornerstone for all property investment is a sustainable pool of tenants. With Birmingham’s current regeneration strategy supporting significant job creation, the city’s rental market is incredibly buoyant and shows no signs of waning.”

“For the London property market, we are expecting there to be a period of instability as the new government sets out its plans for the future of the UK but expect that the ‘calm after the storm’ will see the market settle,” adds Bikhit.

The agency is also calling for a reform on Stamp Duty to help revitalise the capital’s market.

“It is an important measure to ensure the increase in transactions and sales in London,” explains Bikhit. “George Osbourne’s measures have resulted in a drop in transactions and a significant reduction in supply, which is good for no one. At £2,000,000, the price of a two bedroom apartment in Central London means that the buyer pays up to £213,750 in stamp duty. This is making people think twice about moving stopping ‘second steppers’ to move up the ladder, making way for first time buyers.”

“The great thing about property is that it transcends political cycles. The important thing is to arrange transactions consecutively to proof against external factors,” concludes James Greenwood of Stacks Property Search.

“We have seen many clients make a move through the upheaval of the Scottish Referendum, 2015 Election, EU Referendum, US Election – to be in the house that works for them and their family and their life. So our advice to those who were hoping for some certainty so they could get on with their move is, ‘get on with it’. If you want to move, don’t hesitate, start making arrangements now.”

Brits buying abroad

“Uncertainty is going to continue, but from a British buyer’s perspective it’s something they’ve become accustomed to over the last year so it’s unlikely to affect the overseas market in a big way,” says Lloyd Hughes, Communications Director at Athena Advisers, which specialises in French property. “It’s important that a sense of direction is forged as quickly as possible so that some stability returns to the country and the market. There has been a dip in British-led property investment both domestically and internationally since the Referendum result last year, so I’m particularly keen for the Brexit negotiations to commence quickly with a positive outcome.”

UK’s international appeal unaffected

One constant that is expected to remain the same is the UK’s appeal to international investors, thanks to the country’s status as a safe haven, the housing market’s unchanged fundamentals (a shortfall of supply versus strong demand), and the weaker pound against most other currencies. Indeed, the hung parliament saw sterling fall to an eight-week low, but has since recovered to be 1.7 per cent down from before the polls closed, around $1.275.

With the pound already down significantly last year, as a result of the EU referendum, sterling’s weakness is thought to have already priced in any uncertainty during Brexit negotiations, maintaining the UK’s affordable appeal to overseas investors.

“We do not expect this result to have a negative impact on overseas investment to the UK, and believe that occupational markets will remain resilient,” says Knight Frank’s Roberts.

“We expect to see dollar and euro buyers redouble their efforts as they have now been given an extension to the favourable currency conditions they’ve enjoyed since last year’s referendum vote,” comments Athena Advisors’ Hughes.

“London will become and even bigger target, for residential and commercial properties and euro buyers targeting common British second home markets like France will continue to step in where some British have fallen away.”

“The housing market as a whole will be likely to continue to be supported by ultra-low interest rates, despite the risk of higher inflation due to the weak pound, which should remain a fixture through 2017. The weak pound itself should provide some stimulus for the London market in the form of overseas inward investment,” agrees Knight Frank’s Bailey.

Nicholas Holt, Asia-Pacific Head of Research at Knight Frank, adds: “While the outcome of the UK general election has not been decisive, thus causing further political uncertainty, the appeal of the UK market is unlikely to be significantly diminished from an Asian business or investors’ point of view.

“London remains the key European city with education, business and financial ties to large parts of Asia; while the language, legal system, transparency and diversity of its economy will ensure interest remains in the commercial and residential markets.”

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