Brexit and the costs of construction

By now the refrain is probably fairly familiar, the UK needs more homes, preferably affordable ones.  This means that homebuilding has to be a priority for any government, which could becoming a major problem for those in power if Brexit leads to a significant increase in costs for home builders.

The cost of a home is essentially dependent on three factors: the cost of the land (and associated permissions); the cost of materials and the cost of labour, which itself can be subdivided into two categories, namely the cost of human labour and the cost of equipment.  All of these costs can be influenced by government actions, but it is highly debatable whether or not any government could fully control them.

Land costs

There is little the government can do to influence the price at which landowners sell their land.  Compulsory Purchase Orders (CPOs) can only be used in very specific circumstances and even then can be hugely controversial and subject to significant delays if the landowner chooses to put up a fight.  The government can, however, influence the ease and therefore cost with which new developments can be approved and also the terms under which they are approved, e.g. what percentage of the development has to be classed as affordable housing.  It is hard to see how this, in and of itself, would be impacted by Brexit.

Material costs

It’s at this point that the question of building costs gets more interesting.  The UK is the only country in the world to use GBP, which means that if homebuilders have to import materials, then somewhere along the line a currency exchange is going to be involved, which means the value of the pound sterling becomes a factor.  If homebuilders buy in materials priced in the supplier’s currency, then they take the risk of currency fluctuations.  If homebuilders aim to negotiate to have the supplier bill them in GBP then it is to be assumed that the supplier will factor the risk of currency fluctuations into the sales price.  On top of this, there is the question of import duties.  These do lie within the government’s control and the government could, feasibly, choose to allow home builders to import the supplies they need without taxes being paid, but then they could choose to use taxes on building supplies as a bargaining chip in other trade negotiations.

Labour costs

This is where the situation gets even more interesting.  It’s probably common knowledge that the construction industry has benefitted greatly from the supply of labour from the EU, particularly eastern Europe.  In a post Brexit world, the homebuilders will first of all want to know if these people can stay and, if so, if they will want to stay.  Human nature being what it is, it’s probably a fair bet that the answer to the latter question will depend on whether or not the workers see it as being worth their while, which leads back, at least in part, to the issue of the value of the pound.

If there are issues securing human labour, then homebuilders may look to automated solutions, such as the “robot bricklayers” which are already on the market, but the economics of these will depend on various factors, again, including the value of the pound and, of course, the decision as to whether or not to impose import taxes.

It should also be noted that in addition to the economic issues, there may be practical issues, which determine whether or not automation is a feasible choice as each site has its own characteristics and small-scale builds may, literally, not be able to accommodate significant equipment.

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Brexit & The Property Market 1 Year On

The Brexit referendum of 23rd June 2016 feels like a long time ago. It took almost 10 months for Article 50 to be triggered (on the 29th March 2017). While this marked the start of the two-year negotiating period, the start of the actual negotiations was delayed by the fact that the UK parliament called a general election for 8th June 2017. Hence we now find ourselves about a year on from when Brexit was first decided and it’s interesting to take stock of the situation.

Home sales are down but is Brexit the only reason?

According to figures from HMRC, housing transactions in the second half of 2016 were 9 per cent lower than in the second half of 2015. Given the timing, it’s hard to dispute that the result of the Brexit referendum would have played a part in this. At the same time, however, it’s an open question as to whether Brexit itself was the only reason or even the main reason. Taking a step back in time, the Summer Budget of 2015 saw a change to mortgage interest relief for landlords, which had the potential to cause a significant negative impact to the finances of higher rate taxpayers who were also landlords. Shortly after this, the government also announced the “Right to Rent” scheme, which was rolled out in February 2016. Both of these changes were pre-Brexit and both could well have motivated at least some landlords to exit the market or at least reduce their portfolio, which could potentially account for at least some of the drop in transaction volume between 2015 and 2016.

House-price inflation in London stalls

Overall, London is still experiencing house-price inflation, just at a lower rate than in recent years. Again, Brexit could well be a factor in this, particularly the fact that the City is openly nervous about where it will stand in a post-Brexit world. At the same time, however, it should be noted that the 2012 Olympics led to parts of London being significantly regenerated, which caused substantial house-price inflation. During the intervening five years, these increased prices have become a new reality and there is nothing of the nature of the Olympics currently on the horizon to give house prices another boost. At the same time, successive governments have been investing in the north of England, with the Media City initiative beginning long before the concept of the Northern Powerhouse was first mooted. Northern cities such as Manchester have been experiencing house-price inflation at higher levels than London, which suggests that at least part of the slowdown in the London housing market, could be the new competition from further north.

The mortgage market carries on

Arguably the biggest shake-up of the mortgage market in recent years came in April 2014 as a result of the Mortgage Market Review. In very simple terms, lenders now have to look beyond a borrower’s headline income and analyse the real-life affordability of a loan over the long term. Given that Brexit is effectively a step into the unknown, it’s hard to see these rules changing to become less strict at any point in the near future, so in that sense, it’s likely to be business as usual regardless of what form Brexit takes (or even if it’s cancelled). Where Brexit could potentially impact the mortgage market is if it results in upward pressure on inflation. This would not only impact affordability calculations in and of itself, but also place the Bank of England under pressure to raise interest rates and therefore the cost of financing, which would probably be most unwelcome to those with existing mortgages and could potentially discourage people from entering the housing market or moving to bigger properties.

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Why Brexit Might Not Be That Bad

It’s official (almost), the wheels have been set in motion to trigger Article 50 and start the process of taking the UK out of the EU. Understandably, there has been a great deal of media coverage about what this will all mean and while, on the one hand, the future is anybody’s guess, on the other, when trying to determine what will happen, it’s often helpful to look at the fundamentals.

Fundamental 1 – London is a property market apart

London is home to the city, which has been quite open about its concerns regarding leaving the EU. Other European cities have also been quite open about their desire to lure businesses away from their London bases. There are, however, a number of reason to refrain from panicking about a property crash in London, for example:

1 – While it would probably be painful for the city to lose access to the European market, it has global reach so it is highly doubtful that the blow would be terminal.

2 – Even though London and the city are often spoken of as though they were one and the same, in actual fact there is far more to London than the city. The creative industries are one obvious example of this, as is the fact that many digital technology and other “disruptive” companies, have chosen to make London their base. These cover a broad scale from industry giants such as Apple, to niche start-ups. In principle, these companies could be lured away by other cities with equivalent infrastructure and continued access to the single market, however in practice there are a number of reasons why they should stay put.

3 – The UK has a very flexible labour market including a thriving freelance economy, which is great news for companies who need to get work completed but want to avoid the commitment of taking on employees (at least until they have a clearer idea of where they stand). It also tends to be at least relatively accommodating of disruptive business models. Paris, by contrast, has been locked in a battle with tech giant Amazon, which is unlikely to have passed unnoticed by any technology companies who may have been approached about moving there.

Fundamental 2 – The UK is an attractive export market for other countries

While some pundits have speculated that certain EU members may be prepared to sacrifice their own export potential in order to make an example of the UK and deter other countries from leaving the bloc, it’s a wide open question as to whether this would be a feasible ploy in real-world conditions. In simple terms, such an approach carries the risk of causing job losses and this may go down badly with the (voting) public. Even if such a scenario did occur, it is highly likely that other countries would look to fill the gap, which would create reciprocal export opportunities for the UK. This is important for the post-Brexit outlook of regional economies which are based on agriculture and/or manufacturing.

Fundamental 3 – Long-term value will always attract investors

While the weakening of the pound makes it more expensive to import raw materials, it also means that anything priced in sterling becomes more affordable in real terms to international buyers. This includes finished goods (for export), shares in UK-based companies and, of course, property. The fall in the value of sterling could, therefore, help to provide a short-term boost to the UK economy during and after the Brexit process. Over the long term, it is a reasonable expectation that as the UK economy stabilises, the value of sterling will rise again until it is, eventually, back to its pre-Brexit levels.

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