How will Brexit affect House Prices?
The people have spoken.
At some point in the very near future the UK government will trigger Article 50 of the Lisbon treaty and set in motion a process which will see the UK hauled out of the European Union — much to the dismay of some 16 million British citizens who voted to Remain in the EU.
The consequences of Brexit are already beginning to play out (the Pound fell to a 31 year low against the US Dollar) and are the focus of seemingly never-ending discussion & opinion in the media and in local watering holes. Here we will try to cut through the noise and find out what effect the decision to leave the EU will have on property prices here in Britain. To do so we should look at what economic forces might arise from Brexit and their effects on the housing market.
Downward pressures — why prices might fall
Much of the commentary on house prices has been of a negative persuasion, but why might prices fall? Here are a few reasons:
Perception — uncertainty is a plague on the markets from which housing is not immune. A “wait & see” policy on the part of home buyers looks to be by far the biggest threat to price levels following the Leave vote. Many buyers are unsure what will happen and so will simply hold fire until the storm settles. This fall in demand creates downward pressure as sellers lower prices to compete for a smaller pool of buyers.
Unemployment — we have already heard noises from some large employers that many jobs may be at risk as a result of Brexit. HSBC has indicated it could move as many as 1000 jobs from London to Paris, while Vodafone has said it may move its entire headquarters out of the UK. Visa and easyJet are also considering relocation. Employment plays a significant role in housing demand and any rise in unemployment could trigger a fall in prices from weaker demand. This phenomenon is likely to be localised, however, with London seeing the lion’s share of job losses.
Upward pressures — why prices might rise
Somewhat surprisingly, given the doom & gloom of current media sentiment, there are actually some economic forces arising from Brexit which could cause prices to rise — or at least stop them from falling. Some of these are:
Lower borrowing costs — the Bank of England said in the immediate aftermath of the vote that it “will not hesitate to take additional measures as required…” to stabilise markets. This would imply that it will keep interest rates at historic lows for longer than markets had anticipated (a rate rise had been priced in as imminent). Some commentators have even suggested they may be lowered further. Since mortgage rates have historically had an inverse relationship with house prices, any prolonging or reduction of already low rates will put upward pressure on demand for mortgages and thus house prices.
Slowdown in supply — most of the analysis so far has been on the demand side but the supply side is also likely to be affected. Firstly, housebuilders hate nothing more than uncertainty (well, maybe the planning process) and are likely to significantly taper investment in new sites until they have better visibility over prices. Secondly, in the resale market stock is already at historic lows and if would-be sellers think they’re not going to get what they want for their house they will simply stay put — this could easily cancel out the fall in demand. Thirdly but by no means finally, the construction industry is heavily dependent on foreign labour and so any caps on immigration will further exacerbate the industry’s already worrying skills shortage.
Rising wages — simple economics suggest that if immigration controls restrict the supply of labour then the price (i.e. wages) of existing workers will rise. The full story of restricting supply is much more complicated but for many wage rises could be on the cards. Wage levels and house prices are positively correlated and so any rise in wages should have a positive effect on housing demand. This is again likely to be localised.
Cheaper Pound — Sterling fell to a 31-year low against the greenback (US Dollar) in the wake of the Brexit vote. It has since regained some ground but is still looking very cheap against most currencies. This will have foreign investors and British expats who hold foreign currency licking their lips as they gained double digit discounts on UK property investments overnight.
In summary the fate of UK property prices is uncertain but the outlook may not be anywhere near as bleak as many speculators have suggested as supply-side factors coupled with falling borrowing costs and a cheaper pound seem to have been overlooked by many analysts.
Written by Ryan Thomson