There is one thing we know about what a Brexit means should Britain vote to leave the EU in the forthcoming referendum -- that there is much we don't know. Uncertainty is dominating the debate ahead of the poll on 23 June. What does a post-EU Britain look like? How long would a formal Brexit take? And that uncertainty is filtering into the residential property market.
"If we vote to stay in, it'll be back to business relatively quickly. If we vote to leave, I don't think anyone has quite worked out what all that means, other than more uncertainty," said Richard Donnell, director of research and insight at Hometrack, a property analyst, to IBTimes UK.
There are two sides to demand in the property market: domestic and overseas. There is a world of difference between a first-time buyers trying to get onto the property ladder in the outskirts of Leeds, and a Russian oligarch buying a £30m flat in prime central London. They operate with different motives in different markets, and a Brexit would touch them in different ways.
When it comes to the domestic market of owner-occupiers, Brexit may not have much impact. "As far as domestic supply and demand are concerned, I'd say there aren't that many major risks, other than if interest rates go up faster, or more than currently expected," said Stephen Williams, an equity analyst at the investment manager Brewin Dolphin, to IBTimes UK. "We've still got this demand and supply imbalance and I think the demand is still there, supply is still limited. From a domestic point of view, I don't think Brexit is going to have a significant impact at all."
Donnell said he can't see the long-term fundamentals shifting because of a Brexit. House prices are largely informed by people's incomes. So, Donnell said, the Brexit question when it comes to housing is whether it will affect the trajectory of incomes growth. "Long-term, I can't really see the material difference," he said. "But, if the government wants to build more homes, wants to create a stable housing market environment with more mortgage lending, more investment in housing, attracting external sources of investment into housing... then uncertainty and turmoil mean you might not get as much investment as you necessarily might get with stability."
London's unsafe 'safe haven' status
For London, however, there is a greater risk to the property market from a Brexit. The prospect is already hitting the value of sterling, with a drastic plunge anticipated if Britons vote to leave. After the London mayor Boris Johnson gave his support to a Brexit, perceived as an influential political intervention in the debate, sterling fell to a seven-year low against the US dollar. The investment banks Citi and Goldman Sachs both warned a Brexit could cut sterling by a fifth in value as investors flee the pound. Those already invested in London may choose to sell up rather than watch their assets lose value as sterling falls. "For sterling... this won't be a fun time and it's more the uncertainty that will weigh on the currency, rather than investors taking a view on the outcome and the implications for the economy, which are hard to argue either way," said Simon Smith, chief economist at FxPro, a foreign exchange broker.
The top end of the London property market relies on heavy foreign investment. Data from Knight Frank, an estate agent, shows 49% of investors in central London property are foreign. London property is seen as a "safe haven" asset: it retains or increases its value and is protected by the stability and security of a liberal democracy. When war, political turmoil and economic crisis wreaks havoc across the world, investors pour their capital into expensive London property to shelter it. While much of the market is wealthy oil and gas oligarchs from the former Soviet Union and Gulf monarchies, rich eurozone citizens have used London property to escape the sovereign debt crisis and ongoing economic malaise.
European citizens make up around 15% of the prime central London market, according to the estate agent Savills. Capital moves freely in the EU making it easy for Europeans to invest in London. When the radical-left Syriza party won the January 2015 election in depression-stricken Greece, on an anti-austerity platform, London Central Portfolio, which runs property investment funds in the city, reported a ten-fold increase in interest from wealthy Greeks. Brexit may cost London property its safe-haven status among Europeans, at least, as those already invested could sell up and look elsewhere in the EU, while others may be deterred from investing altogether.
Samy Chaar, chief economist at Geneva-based private bank Lombard Odier, told Investment Europe investors concerned about the impact of Brexit "should avoid anything that relies heavily on foreign investor demand – like prime London property. Avoid UK banks and keep a low exposure to sterling. Instead choose high-quality corporate bonds issued in dollars."
But Stephen Williams, an equity analyst at the investment manager Brewin Dolphin, told IBTimes UK that while he thought a Brexit may lower property prices in London a little, the market "is probably overheating anyway at the moment... I don't think the UK's safe haven status would actually be impacted too much by Brexit."
There is also a chance that weaker sterling could attract more investment in London property. The relative strength of the pound against emerging currencies has made property investments in the city less attractive to some overseas investors, a situation Brexit might reverse. When sterling plummeted during the financial crisis, the London market boomed because foreign investors flooded in and bought up property in prime central postcodes at relatively cheap prices.
Moreover, a Brexit may embolden the City of London's position in the world by releasing it from the EU's rules and regulations, such as the financial transactions tax, which the UK government opposes. "[Brexit] could result in an enhanced protection of the position of London as the global financial capital for financial services," said Paul Israel, chief financial officer at Cogress, an open equity firm offering access to property investments normally restricted to large investors.
"This position brings capital inflows and stability which have been key to the UK property market in the prior decade, particularly for London. Access to the single market has not been a significant reason to be in London historically so it should be unchanged. There is a possibility for short-term economic growth on Brexit with a likely potential corresponding boost to the economy which should help the property market."
Williams said he thinks the UK "is still going to be seen as a stepping stone to Europe. And potentially the UK economy could speed up. The UK is running at a different rate at the moment to the rest of Europe, and if you took the EU shackles off a bit, then perhaps the UK economy could move ahead faster than the rest of the EU."
'Short, sharp campaign'
In the short-term at least, the EU referendum will likely suppress activity in the housing market. Donnell of Hometrack analysed the Scottish property market in the tumultuous 18 months prior to the independence referendum in September 2014. He found a 10% drop in transactions compared to what could have been expected had there been no referendum. A key difference, however, is that the lead up to the EU referendum is only four months long.
"I think it's a short, sharp campaign," Donnell said. "If we take the Scottish example, it's bound to have some impact on levels of market activity. Market activity has plateaued in the last year anyway. Transaction volumes in the last year for housing have flatlined, more or less, and fallen in parts of London and the south east. So this will just add to the view that there's going to be a slowdown in house price inflation on lower activity. But because we've got a shorter, sharper campaign, hopefully the impact is going to be less pronounced.
"I think the level to which the debate really cuts into jobs, the outlook for your income, possibly mortgages -- the more the debate becomes about economic consequences of in or out, and the more it resonates with people and their own financial decision-making, then I think the greater the impact will be. It will really be a turnover impact. It'll just mean people don't participate in the market until it's resolved."