Real Estate Trend of UK & China

Britain’s Brexit leads to a sharp drop in London house prices

According to the report of the British Newspaper, the Guardian on December 26th, due to the double influence of Brexit and rising interest rates in the UK, the growth of housing price in the UK will slow down in 2018, or a slight increase which is below inflation expectations.

Some commentators predicted that UK house prices might remain stable in 2018 at about 1%, which means that real estate prices have fallen. Savills, the British real estate company, said that London’s housing price forecast is more pessimistic based on the house price movements over the past 10 years.

According to the latest data reported by the British "Guardian," house prices in London, once the most prosperous real estate industry in the UK have fallen as much as 15% in the past year.

The data released by Halifax last week also showed that the annual growth rate of UK housing prices has dropped to 1.8%, the lowest level in the past five years.

The data from “Your Move,” a major UK housing agency, shows that the average house prices in Wandsworth District, southwest of London including Clapham, Balem, and Putney, have fallen by 15% in the past 12 months. In January 2017, the average house price in Wandsworth was stable at ￡805,000, but a year later, the average house prices have fallen to ￡685,000 and have fallen by more than ￡120,000.   

Moreover, house prices in other parts of London have also fallen sharply. During the past year, the average house price in Southward in South London has dropped from 666,000 pounds to 585,000 pounds; and in Islington, in the north of London, the average price of a house has fallen from the initial 750,000 pounds to 68.4 million pounds.

Your Move, the home agency, said that this was the sharpest drop in house prices in London since August 2009 and that the last major house price fall was due to the subprime crisis in the banking sector from 2008 to 2009.

Since last May, the year-on-year growth rate of UK house prices has dropped for eight consecutive months. During the period from 2012 to 2016, the growth rate of house prices in the UK has continued to rise. The highest point of growth in the past six years occurred in August 2014, and again in February 2016, the price reached a high of 9%.

However, since then, the overall growth rate of UK housing prices has been declining. Except for the slight rebound from February to May in 2017, house prices have been on an accelerated downward trend since May. This must be reminiscent of the continuing impact of Brexit in June.

Analysts predict that after the UK's Brexit in 2016, the devaluation of the British pounds led to an increase in household consumption costs and weakened household budgets. At the same time, the new UK provision for renting houses also puts pressure on consumers to purchase loans.

Rightmove, a real estate website operator, said that economic and political uncertainties often cause great pressure on capital. House prices in London may fall by a further 2% in 2018.

According to a report by Reuters on February 17, EU migrants working in the UK in the fourth quarter of the 16th had their largest drop in 20 years, indicating that Brexit and the pound's fall have weakened Britain's attractiveness. The UK’s economy is heavily dependent on foreign labor, and the Brexit has resulted in a large number of migrants from the EU. This undoubtedly reduces the demand for home purchases in the UK, and London, as the largest immigration city, bears the brunt of it.

BBC reported the warning from British Chancellor of the Exchequer George Osborne as early as 2016: “If the people choose to leave the European Union during the June referendum, London property prices may fall by 18%, and the overall UK economy will also be severely hit.”

The Bank of England stated on February 9 that due to the acceleration of global economic growth, the central bank is expected to raise interest rates faster than expected last year. This statement may strengthen the central bank’s expectations of raising interest rates again within a few months. At the same time, this year's economic growth in the UK is expected to increase from 1.5% in November last year to 1.7%, which is expected to reflect the general trend of global economic recovery.

Bank of England Governor Mark Carney explained to the British Chancellor of the Exchequer Philip Hammond that, if the economic situation in the future is generally in line with expectations, it may be necessary to tighten monetary policy earlier and the tightening rate must be greater. This will undoubtedly worsen the future of British real estate.

As far as in China, real estate investment opportunities in 2018 will be relatively unfavorable to the property market in Beijing, Tianjin, Hebei and relatively favorable in the Pearl River Delta and the Yangtze River Delta. The focus will be on finding strong players in the third and fourth line cities.

Real estate has always been a tool for the government to stabilize the economy, but it is also a double-edged sword.

The high housing prices in Tier 1 and Tier 2 cities and the high stocks in Tier 3 and Tier 4 cities, as well as the high leverage ratios of housing enterprises and residents, resemble the hanging sword of Damocles, which has become a hidden danger for economic operations.

Since the fourth quarter of 2016, the government has introduced more refined control policies and has achieved initial results. Given the predicament that a second-tier house price has been at a high level, the policy of proceeding from the demand level, namely the practice of restricting the purchase of frozen loans, has erased the rise in house prices. At the supply side, real estate inventories in third and fourth-tier cities continued to decline through the implementation of differentiated credit policies.

The stimulating effect of the previous fiscal stimulus on aggregate demand is gradually weakening, the growth in infrastructure investment is weak, the investment in manufacturing investment is insufficient, and the downward pressure on the economy is gradually increasing. The continuous promotion of supply-side reform also needs to be matched by the total demand expansion policy.

Looking ahead, the bottom line of economic growth is surviving. The doubling of GDP in 2020 is the bottom line of the planned economic growth in the 13th Five-Year Plan. It is inevitable that the GDP growth rate will remain above 6.3% in the next three years.

The policy of real estate regulation is bound to face greater challenges. Will China, like many times in the past, relax the regulation of real estate for economic growth? This answer may not be the same, the overall real estate regulation and control ideas have undergone major changes.

In the past, real estate regulation mostly started from the demand side, and later it will focus more on the supply side. The report of the Nineteenth Congress emphasized that “adhering to the principle of persisting in the house is not used for speculation, and accelerating the establishment of a housing system with multi-subject supply, multi-channel protection, and rent-purchase so that all people can live in abode.” The general direction of real estate is the reform from the supply side.

The first goal of real estate regulation in the future is to stabilize housing prices; The second is to increase housing supply through multiple channels. There is still a large number of demand for houses in tier 1 and tier 2 that have not yet been met. There are still a large number of shanty towns in tier 3 and tier 4 that needs to be reconstructed. Many farmers still need to enter the city, which promotes the healthy development of the real estate market while also stimulating total demand.

Source: Economics; Information Daily