Many people these days are fearing a Brexit. First in line is David Cameron, the Prime Minister, who will be a) out of his job and b) have the questionable honour of being able pride himself on having led his country out of the EU. Then there are the bankers at British and international banks who have so far been working happily in the City of London or, a bit less happily, in Canary Wharf. They might find themselves in need of a new office, were the UK to exit the European Union. A third group, besides the German car manufacturers, Germany’s chancellor Angela Merkel and the IMF’s Christine Lagarde, is the real estate industry in London.
According to the most recent studies, a Brexit could lead to an abrupt drop in house prices in the capital and the South East. Finance Minister Osborne recently forecasted a slide of up to 18 percent. Other economists expect a devaluation of at least ten percent. Up to 200.000 employees could be relocated to other European cities, a recent study by Geophy found. This would free up more than one million square metres in office space and put several thousand flats back on to the market.
S&P wrote in a report that a Brexit “could potentially reverse the significant boost to real estate asset values that the UK, and London in particular, has experienced in recent years”. Up until recently, house prices in London have increased by around nine or ten percent a year – a fact that led to many consumers (especially those who own a house) feeling much more buoyant about their economic prospects, even though, for many, it was just a paper gain, not a real one.
The sector is not that optimistic anymore. Like other parts of the British economy that have come to a standstill, the real estate industry is in shock-freeze. The number of deals done has shrunk dramatically and asking prices are falling. Some weeks ago, the head of the UK’s largest commercial property company warned of a demand shock in the London office market. Robert Noel, chief executive of Land Securities, told the FT that “repricing would be more drastic” than after a general election.
Potential sellers are advised against putting their house up for sale because of demoted interest. Buyers, especially if they are not British but from continental Europe, are staying back and waiting. Not only do they fear that they might miss out on a rebate if they buy now – according to forecasts, a Brexit would go hand in hand with a substantial drop in sterling – but they also fear that they might buy a property in a country in which they currently live and work but for which they might need a visa in some years from now. Consequently, a friend of mine who wanted to sell her house near Hammersmith has decided against it. “It makes no sense at the moment, Nina”, she said. “I will wait until the 23rd of June is over.” Overseas buyers will also wait and see.
For younger people like me, the debate around Brexit and house prices is very much a non-debate. With average prices for a flat in London now at over 550.000 pounds, according to Nationwide, 9.2 times average earnings, a flat or a house is for many as remote a thought as marrying a millionaire. Thanks to a restrictive permission policy, protected green-belts and nimbys (people who say “not in my backyard” and block all development around their property if they can), London is undergoing a severe housing crisis.
As the population of the capital approaches nine million, construction is simply not keeping up the pace, resulting in high rents and high house prices. I, for example, pay 1.380 pounds for a flat in Zone 2, an average price for London if you don’t want to live in a shared flat with roommates or with your parents. The latter seems to be gaining some traction: According to the insurer Aviva, a million more young people in the UK will have to live with their parents by 2025 because of the shortage of affordable housing.
The problem is that property is serving as one of the core means for wealth multiplication in London and the South East. If you were lucky enough to buy a cheap, old flat in the 80s, you might now own your third or even fourth property and be substantially better off than when you first started climbing the so-called housing ladder.
Due to the lack of supply, strong interest from overseas buyers and misguided policies like the “right to buy”-policy which allowed tenants to buy their council flats but did not replenish the stock of council housing, London is one of the least affordable places in the world to work and live. Because there are more house owners than tenants, politics has no incentive to really change this.
In the long run, London might be losing talent to other British and European cities because of its massively overpriced housing market. To someone like me who comes from a country that was for a long time known for its moderate house prices, this signals a fundamental flaw in the housing market. I am of course aware that Germany has observed strong house price growth as well, thanks in part to the ultra-loose monetary policy of the ECB.
However, places like Berlin are still miles away from what Londoners have to pay for having a roof over their heads. At least with regard to the housing market, a Brexit could be a welcome incident for many Londoners.