After an eight-hour wait, during which 382 counting areas processed over 30 million votes, the results are in: the UK has voted to leave the European Union.
The verdict signals an end to four months of campaigning that saw the UK divided in two. Even within the Conservative and Labour parties, members were in disagreement about where they stood on the UK’s most important political decision of this generation.
With polls too close to call until the very last minute, and with no exit polls commissioned for fear of inaccuracy, the future of the UK was unknown until 6am this morning. But the count now shows that the ‘Brexit’ camp eventually secured victory, having won 51.9% of the vote.
The UK did not leave the EU overnight. It is currently still a member; the withdrawal process will begin when the Prime Minister enacts Article 50 of the Lisbon treaty.
Who exactly Article 50 will be enacted by is another question. David Cameron announced his resignation just two hours after the outcome of the referendum became known. He will step down in October. The favourite to replace him is ex-Mayor of London and prominent ‘leave’ supporter Boris Johnson.
Then will begin negotiations over the exact nature of the UK’s withdrawal and its future relationship with the EU. The negotiations will conclude either on a pre-agreed date, or two years after the activation of Article 50.
The UK now faces a period of transition
The period of uncertainty is far from over. During its 43-year membership of the EU, the UK has undergone some enormous economic and political transitions, and how it will fare outside of the union is unknown. But the coming months and years are likely to be turbulent.
First, the UK will need to draw up new trade deals with the EU.
Simon Hix, a Professor of Political Science at the London School of Economics and Political Science, writes that the UK would need to continue to participate in the European single market, and that its dominant trading partner would continue to be Europe.
But negotiating favourable deals may prove difficult; German Chancellor Angela Merkel has warned that the UK will now be a “third party” and “will [no longer] benefit from the advantages of the European common market”.
Foreign capital, inflation and the value of the pound
Most economists predict a fall in the value of the pound. Some expect that the value of sterling could fall by up to a fifth as confidence in an independent UK wavers. Indeed, the pound has already fallen to its lowest level against the dollar since 1985. The stock market has also taken a hit, with the FTSE falling more than 500 points shortly after trading began at 8am.
A weaker currency leads to more expensive imports, and could cause inflation to increase. The National Institute of Economic and Social Research has predicted CPI growth of around 2–4%.
A depreciating currency could mean less interest in high-end UK property from foreign buyers. A collapse in the prime market in which a great deal of foreign capital is invested could have a ‘trickle-down’ effect on the rest of the property market.
But this scenario is not a foregone conclusion. A cheaper pound could actually increase foreign interest in UK property, as it will be less expensive to buy. Meanwhile, cheaper exports could lead to industrial growth, which could in turn drive up consumer demand and prevent a housing crash.
Interest rates and mortgage costs
Worst-case predictions have involved a Brexit vote triggering a recession, as uncertainty around trade renegotiations dissuades businesses from investing in the UK.
If inflation were to spike, the Bank of England would need to act to control it. This would mean raising the Bank of England base rate, which has been at an all-time low since 2009.
Rising borrowing costs would be bad news for landlords on tracker or variable rates, or those who are looking to take on additional finance. Those who have fixed their interest rates, or who can cut costs elsewhere, may benefit from increased demand from tenants, as rising costs will also lock first-time buyers out of the market.
On the other hand, interest rates might fall. In an effort to prevent recession by encouraging spending, the Bank of England could in fact cut rates. This would make mortgage costs cheaper, decreasing borrowing costs for landlords but ensuring more competition for housing.
Construction, labour and tenant spending power
The two scenarios described above paint very different outcomes for both housing investment and tenant wealth.
Diminished confidence and slowing growth could cause the construction industry to shrink, meaning fewer properties being completed. And if a recession impacts household income, tenants would have, on balance, less spending power. This could cause rents to stall or fall and arrears and possession claims to rise.
But if the more optimistic scenario comes to pass, housing infrastructure could grow, while household finances could remain stable or even improve.
Immigration, one of the main talking points of the referendum debates, also has an important part to play in the performance of the housing market. Labour mobility and foreign skills have been particularly important to the construction sector, which some believe could suffer if an independent UK closes its borders.
Market performance is down to a delicate balance of fundamentals. If construction falls, property prices and rents could rise; but this would too depend on demand, which is influenced by consumer spending power. Only time will tell how the decision to leave the EU will impact the economy and the housing market.
Governance and law
David Smith, Policy Director at the Residential Landlords Association, anticipates a “period of some confusion” as the UK disentangles itself from EU law.
As part of the withdrawal process, it will be necessary to repeal or replace any EU legislation that effects the housing sector. There may also need to be a third Immigration Bill, which could impose further obligations on landlords.
Furthermore, several pieces of intended legislation – such as the extension of mandatory HMO licensing – may become lower priority as the negotiations commence for departure from the EU. This could come as a relief to landlords who have felt increasingly burdened by the growing number of proposed legislative interventions in the sector.
Here to help with your next buy-to-let mortgage
However uncertain the future may be, the truths that underpin the success of the buy-to-let sector remain. Housing remains, over the long term, a strong investment. And British tenants will always need homes.
Nothing is immutable, and the market will always present challenges. Investors who remain responsive to change and plan for the future have the best chance of success in an independent UK.
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