What would a ‘Brexit’ mean for the UK Housing Market?8th June 2016
The UK Housing Market seems to have become a key battleground upon which both ‘in’ and ‘out’ camps have thrust forward their unequivocal, yet diametrically opposed arguments. So what precisely are both sides predicting and why? Can history aid us at all in reaching a confident forecast? And will such speculation influence how the public vote anyway?
Just in case you haven’t read enough conjecture about the pros and cons of a ‘Brexit’ I thought I’d chip in with some of my own. Given some might suggest Jackson Grundy have a vested interest in the result of the vote, I have consciously tried to limit personal comment (as best anyone with an opinion can) and have sought to concentrate on summarising the arguments.
A MULTI-FACETED ISSUE
The first suggestion I’d like to make is that the UK Housing Market is a many headed beast and not all heads react and move in the same direction at the same time. This particular behaviour is unlikely to change regardless of whether we remain in or leave the EU. Regional markets react differently to the London market, and demand for property is often driven by differing factors:- regional house prices, local employment and wage growth, immigration levels, and investment opportunities to name just a few.
Highlighting possibly one of the most marked contrasts, Shane Croucher (International Business Times) writes: ‘There are two sides to demand in the property market: domestic and overseas. There is a world of difference between a first-time buyer trying to get onto the property ladder in the outskirts of Leeds, and a Russian oligarch buying a £30m flat in prime central London…and a Brexit would touch them in different ways.’ The problem arises when we consider that the effects of Brexit might also touch the two examples in different ways depending on whose set of forecasts you believe to be the most likely.
THE PRE-VOTE PICTURE
In the interest of providing some context, at Jackson Grundy we have seen a 7% increase in the average house price over the last 12 months, the Office for National Statistics reports it at 9% across the UK. Halifax has stated that there has been a 1.4% increase in prices over the three months leading up to the end of May compared to the previous quarter. In short, largely undeterred demand coupled with low supply continues to stimulate house price inflation. So how might this change post Brexit?
A survey conducted earlier this year by Accountancy firm KPMG found that 66% of real estate experts believed that ‘Britain leaving the EU would have a negative impact on inbound cross-border investment’. There are a number of possible reasons why this might happen; the most obvious of which being reduced European immigration, which could also cause a reduction in property prices due to lower levels of demand.
Perhaps unsurprisingly there is a counter argument which maintains that (especially in London) investment comes from many sources outside of Europe, which if anything might increase were the British government to carry out measures to encourage this sector once free to regulate the market as it sees fit. However, critics of this argument suggest that home grown regulation may well be more stifling than the status quo.
MORE ABOUT PRICES
Controversially the Treasury have announced that average house prices could fall by between 10 and 18 percent by 2018 in the aftermath of a ‘Brexit’. This follows similar assertions by the likes of Deutsche Bank (perhaps less than impartial) and The International Monetary Fund. Conversely, the Office for Budget Responsibility are projecting a 10% increase in house prices were we to remain in the EU – however there are some who would question the credibility and accuracy of said Office.
WOULDN’T LOWER HOUSE PRICES BE A GOOD THING?
A number of high profile advocates of Brexit do not seem to dispute that prices will fall, but rather assert that lower prices would lead to greater affordability for those currently struggling to get on the property ladder. This has been a key argument used by the ‘Leave’ camp to win over younger voters. In isolation, with all other factors being equal, this point might be difficult to dispute, however all other factors are not likely to remain constant as I’ll move on to.
WHAT ABOUT INTEREST RATES?
The ‘Remain’ campaign have projected that Brexit would lead to an increase in the cost of borrowing brought about by a combination of a post-exit recession and fall in the value of Sterling. ‘Britain Stronger in Europe’ states that analysis indicates mortgage rates could rise by 70 basis points, resulting in a mortgage rate of 1.5% rising to 2.2%. They have translated this to suggest that the annual cost of the average mortgage could increase by £920. In addition to this, should mortgage lending criteria tighten in conjunction with increased interest rates, whilst first time buyers might benefit from lower house prices in principle, they may well find it more difficult to actually get a mortgage in the first place.
One of the counter arguments put forward by the ‘Leave’ campaign on this point is that remaining in the EU would tie Britain’s economy to a eurozone crisis which would be a danger to Britain. They argue that any economic fallout as a result could essentially lead to the same set of undesirable consequences that the ‘Remain’ campaign say would occur were we to leave the EU. Again, this really is a case of whose projections you believe to be more likely.
CAN HISTORY HELP US?
So is there any precedence for this situation? The short answer is no, not exactly. The UK has, however, clearly experienced credit crunches and housing market declines before, which can arguably offer some parallels without being precisely the same. The 2008 financial crisis, and drop in the value of Sterling, led to an increase in the cost of borrowing, greater barriers of access to lending and consequentially significant house price decline.
Increases in interest rates during the 1990s were also largely responsible for the resulting housing market crash.
These hypotheses, however, assume that leaving the EU will cause a recession and/or increased interest rates in the first place, so their relevance depends on how you feel about that supposition.
HOW HIGH A PRIORITY IS THE HOUSING MARKET TO YOU ANYWAY?
As you might expect, the performance of the Housing Market is of acute interest to Jackson Grundy as a business, and if you’re reading this I assume it’s of some interest to you also. However its fate, post-referendum, may well not be a key consideration in forming your opinion on which way to vote. Still, hopefully you will feel you have an overview of both sides of the debate on this subject, even if it doesn’t help you reach a definitive conclusion in itself.