Despite official predictions of a collapse in house prices if the UK voted in favour of Brexit in 2016, the housing market has defied gravity for the past two and a half years and posted modest gains. We are now faced with similar calls from the Bank of England (amongst others), which foresees up to a 35% fall in house prices in the event of a no-deal Brexit. But could the ‘experts’ be wrong all over again?
According to research from estate agent Emoov, average monthly house price growth since the referendum is 0.26%, which is slower than the 0.33% a month on average in the months following the economic crash of 2007 while prices recovered to their pre-crash peak. Although the Brexit vote appears to have slowed the rate of house price inflation, this is a far cry from the Treasury’s predictions of a 10% fall.
The underlying picture is one of regional divergence. Whilst it is true that London and the South East have seen house prices fall lately – possibly due to the reduction in demand from overseas buyers in the face of Brexit – the slack has been taken up by the rest of the UK market, particularly the larger cities of the North and the Midlands, which have risen to the top of the house price performance tables of late.
But uncertainty over the outcome of the Brexit process has led many buyers to hold off until after 29th March in hope of a better deal. According to research from OneFamily, 55% of aspiring first-time buyers with a deposit at the ready are holding off on buying as a result of Brexit – the equivalent of at least 136,000 people across the UK. That’s a large chunk of pent-up demand waiting to flood the market once we have a better picture of the UK’s post-Brexit future.
Russell Quirk, the founder of estate agency Emoov, remains sanguine about the impact Brexit will have on house prices. “Once the uncertainty of whether and how we leave the EU is finally set, my expectation is that we will see a bounce in property market sentiment and activity. You can’t keep the UK market down when demand exceeds supply, money is cheap and we Brits continue to adopt a property owning, aspirational culture.”
Although many potential buyers are holding off because they believe prices will fall after Brexit, the opposite could well be the case as this wave of demand hits the market. Moreover, even in the event of a no-deal Brexit, it is unreasonable to assume that people will put their lives on hold indefinitely because they are uncertain about the UK’s economic future. In any case, in that scenario the Bank of England would be likely to support the housing market, possibly by reducing interest rates and re-activating quantitative easing.
Although Mark Carney warned that he would be unable to slash interest rates to support the economy after Brexit due to the inflationary impact that the fall in sterling would have, it is interesting to note that the Bank of England did exactly that after the Brexit vote in 2016, despite the fact that sterling fell heavily on international currency markets thus pushing inflation higher. With that in mind, it is tempting to say that the Bank is merely engaged in scaremongering.
Mervyn King, erstwhile Governor of the Bank of England, is one senior figure who has voiced his disappointment at what he sees as the Bank of England being “unnecessarily drawn into this project [of scaremongering].” As he points out, the Bank of England’s worst-case scenario shows the cost of leaving without a deal exceeding 10 percent of GDP. “Two factors are responsible for the size of this effect: first, the assertion that productivity will fall because of lower trade; second, the assumption that disruption at borders — queues of lorries and interminable customs checks — will continue year after year. Neither is plausible.”
Meanwhile, on the supply-side, there are also signs that housebuilders have been holding back in terms of the volume of houses they produce due to uncertainty over Brexit negotiations. This means that the number of housing completions is still well below the government’s own 300,000 houses a year target that is supposedly needed merely to keep pace with demand. Many landlords have been net sellers of property in recent years due to changes in tax on buy-to-let, but this is likely to subside soon.
In terms of affordability the outlook remains positive. Employment is at a record high and wage increases are now outstripping the rate of inflation. Borrowing costs remain at rock bottom and are unlikely to rise significantly any time soon. Despite all the doom-and-gloom out there in the media, there is still a lot to be optimistic about in the UK housing market.