Brexit – What it Means For House Prices & The UK Property Market
David Cameron risked Brexit by promising a referendum on Britain’s membership of the EU in return for votes, he was gambling – with both the economy and his own career. Of course, we now know that this gamble backfired on the former Prime Minister… and now former MP.
But what is not so certain is how leaving the European Union (Brexit) will affect the various elements of the British economy. Everything from the property market to manufacturing in the UK now faces a highly uncertain future.
Whether, in the long term, Britain’s exit from the EU proves to be a calamity or political masterstroke is moot. But for now, and for at least the next five years, business leaders and politicians are stepping into the unknown.
Very few political events have split communities and families in the way the EU referendum has. Make no mistake; this was not just an economic or political decision – it was an emotional choice too. The extent to which the UK was split on the issue of Brexit can be assessed by looking at the most basic of statistical analysis.
Broadly speaking, the South of England voted to leave the EU – but only if you remove the capital from the equation. Londoners actually voted to remain in the world’s largest political union, as did Scotland and Northern Ireland. Of course, the northern heartlands of England were firmly of the belief that the UK’s future lies outside the EU.
And then there was the clear difference of opinion between the generations. According to a survey by YouGov, 75% of voters between the ages of 18 and 24 voted to remain in the EU. Conversely, only 33% of over 65s voted the same way.
What followed was a vitriolic online slanging match between ‘leavers’ and ‘remainers’. The over 50s were accused of jeopardising the prospects of the younger generation, while young voters were accused of bigotry and ageism. But that was immediately after the shock result – when feelings were raw.
Several weeks on from the result, it’s very much business as usual. Although there was a brief downturn on the markets, the situation has stabilised, and the same can be said for the Pound. Manufacturing output has rallied, and the short-term outlook for the economy isn’t too disheartening. But the fact remains that the uncertainty which now pervades daily life in the UK – and the EU – will undoubtedly impact almost every facet of the economy in some way or another.
Understandably, politicians and the media have been focusing their attention on the headline aspects of the British economy post-Brexit: jobs, inflation, manufacturing output, share prices, Sterling and GDP. The property market hasn’t been a major topic of conversation at national level since the Brexit vote, but it needs to be.
Evidence of how crucial the property market is to the British economy can be found by assessing the causes of the 2008 banking crisis. If Brexit directly and adversely affects Britain’s market for property, the consequences could be wide-ranging – and potentially devastating.
Post Brexit property prices and demand for homes in the UK have already been affected by the decision to leave the EU, something this article will examine in detail later. And this hugely complex story is still in its infancy. There are countless issues at play at every level of the market. To fully understand how the Brexit shockwave will affect Britain’s property market, every possible scenario must be examined.
What Will Brexit Mean for the Wider Economy in the UK?
While the decision to leave the EU has been made, the UK’s relationship with the Union going forward won’t be known until the terms of the divorce have been finalised. If the British government decides to use all of its permitted time to negotiate the best possible deal (which it probably will), we could be facing more than two years of uncertainty. And uncertainty is always bad for business.
The Brexit property market will be co-dependent on the various other economic factors affecting Britain, so it makes sense to address how Brexit might affect the economy generally.
In the immediate aftermath of the vote, several leading economists – along with the International Monetary Fund – slashed their predictions for economic growth in the UK. Until we know what a post-Brexit Britain will look like, corporations and investors will look upon Britain as a relatively risky place to do business.
Unfortunately, Brexit has highlighted some serious deficiencies in the UK’s democratic DNA, which are creating even more uncertainty. It would seem that the prospect of an effective opposition with the potential to create a viable alternative to the incumbent government is distant. Moreover, the government’s failure to put in place a contingency plan for Brexit is a huge cause for concern amongst Britain’s biggest businesses.
During the EU referendum campaign, George Osborne referred to the possibility of a ‘DIY recession’, brought about by the decision to leave the world’s largest free-trade area. While this may have been political rhetoric, the possibility of a recession within the next few years is high. However, it is worth noting that Britain has endured five different official recessions during its time as an EU member state.
The worst case scenario for British businesses would be a complete failure to forge a new trade agreement with the EU. However, there would still be the comfort blanket of World Trade Organization tariffs to rely on – something many successful economies rely on today.
A minority of economists are predicting that leaving the EU will actually boost growth in the medium term. The ability to forge trade agreements around the world on a bilateral basis could secure new investment and jobs. British businesses and entrepreneurs would also be free of the notorious red tape that is often synonymous with the EU policy making machine.
One of the most eye-catching headlines to emerge in the aftermath of the ‘leave’ vote was the downgrading of the UK’s credit rating by Fitch, S&P and Moody’s. For now, this initial downgrade won’t have a significant effect on the UK economy. However, if UK government debt loses its investment grade status, British gilts may be deemed riskier – something that might eventually make government borrowing more expensive.
In response to some weak economic data following the Brexit vote, the Bank of England dropped the base rate to an historic low of 0.25%. And there is a reasonable possibility that we’ll see interest rates cut to zero before Brexit finally happens. But this move to stimulate the economy won’t necessarily make borrowing cheaper for ordinary people. If lenders believe that the uncertainty surrounding Brexit poses a risk to the wider economy, there is a chance that mortgages, credit cards and personal loans will actually become more expensive.
The financial markets took an initial tumble immediately after the ‘leave’ vote, but they soon rallied – eventually reaching near record levels. The weak Pound is good for British exports, and this is obviously outweighing the uncertainty that surrounds the economy. But it might just take one instance of bad news regarding Brexit for the markets to take a tumble. Weak markets affect our pensions, property market, employment levels and general prosperity, so they shouldn’t be viewed as inconsequential to everyday life in Britain.
Worryingly, financial and professional services account for around 12% of the UK’s GDP. As a result of the Brexit vote, the Head of the European Central Bank predicted that London might lose its status as Europe’s financial epicentre. PwC released a report that suggests up to 100,000 jobs in the financial services sector could move to EU cities – a result of British-based banks’ inability to advise on European transactions and deal in Euros.
What immediate effect did the Brexit vote have on the UK’s property market?
The simple truth is we still don’t know what effect the UK leaving the EU will have on Britain’s post Brexit property market. However, there have been some signs – albeit somewhat temporary – of what to expect when the UK finally parts company with the European Union.
According to the Council of Mortgage lenders, mortgage approvals fell dramatically during the first month after the Brexit vote. The total borrowed in July was £10.9bn – down 13 percent on June’s figure. But whether or not this drop was wholly down to the Brexit vote is not yet known, as the June figures were unusually high.
Perhaps part of the initial problem following the referendum was the fact that most political analysts were predicting a narrow victory for ‘Remain’ just days before the vote. The shock that resulted made investors at the upper end of the market extremely nervous. Developers and property owners in London slashed their prices almost immediately. Indeed, according to LondRes the number of cuts to asking prices soared by 163% during the 12 days immediately after the vote.
Despite hefty discounts, buyers remained highly cautious. Compared to the previous year, completions in London’s trendiest property districts were down by 43%. At the same time, buyers who were prepared to do business leveraged this new-found power to haggle prices down further.
Anecdotally, there was talk of house sales being completed in London for 10 percent less after the Brexit vote than the week before. And predictions of a 25% fall in the number of house sales in London during the three months following the vote were soon being made.
Nationally, the picture was similar, with a £3,600 fall in asking prices during the weeks immediately after the vote. This coincided with a marked rise in the time taken to sell a home in the UK. While these statistics can’t be wholly attributed to the Brexit vote, many property experts believe that they are at least partly related to the nation’s decision to leave the EU – and all the uncertainty that brings.
Perhaps the single most worrying development to hit the property market after the Brexit vote was the news that major property funds had ceased trading due to concerns about the future. And it soon became apparent that more property funds would be forced to stop investors making withdrawals in the aftermath of the vote.
Investment portfolios from M&G Investments, Aviva Investors and Standard Life were locked down for fear of a ‘rush of withdrawals’. Of course, what post Brexit property investment will look like is still something we will have to wait several months for. The initial rush to pull out of the UK property market was sparked by fear of the uncertain. Whether this phenomenon persists is yet to be seen.
Another high-profile setback for the UK property market came in the form of a Singapore bank’s decision to stop lending against property in London. United Overseas Bank is Singapore’s third biggest provider of home loans, so its decision sent a chilling message to the world. After decades of soaring house prices and record investment, London’s property market was now regarded as a risky place to do business. Fears of contagion immediately followed – although the situation has stabilised somewhat since.
But it hasn’t all been bad news for the UK property market in the aftermath of the Brexit vote. A weaker Pound has given international investors the chance to find some real value in the market. And Chinese investors are leading the way. According to Market Watch, property enquiries by Chinese investors in August 2016 were between 30% and 40% higher than the average for 2016.
Whichever way the EU vote went, there was always going to be a short-term reaction from the property market. After some very dramatic events immediately after the vote, it would seem that common sense and logical thinking have taken over from hysteria and fear. But the next big Brexit-related crisis could be just around the corner.
How Is Brexit Affecting the British Construction Industry?
The health of the nation’s finances can often be gauged by taking a close look at the health of the construction industry. Unfortunately for the wider economy, construction in Britain is in a state of flux at present.
Before the EU referendum, a survey by Smith & Williamson revealed only 15% of the construction executives questioned felt that Brexit would have a positive effect on the industry. Uncertainty and change are always bad news for the property market – and whatever is bad for the property market is inevitably bad for the construction industry.
There is significant evidence to suggest that the concerns of construction executives in Britain are legitimate. According to a report on The Independent website, an unnamed source within the industry revealed that construction would be hit hard in early 2017 – a result of the reticence to invest in property because of Brexit-related uncertainty.
In the short term, building projects that were green-lit before the referendum will go ahead. Unfortunately, there was a sudden and substantial decline in new construction projects after June 23rd 2016. There could be up to £20bn of investment in property projects at risk, which would have a devastating impact on jobs and investment throughout the country.
The true effect on the construction industry post Brexit will only become apparent once the details of the break-up have been finalised. But there are some consequences of the vote that can be measured today. For instance, investing in British property from abroad immediately became cheaper after the vote, thanks to a significantly weakened Pound. Increased value for money in the market could attract more investment from China and South East Asia, which could give the construction industry a much-needed boost.
According to the Department for Business Skills, around 64% of building materials used in the UK during 2010 were imported from abroad. A weaker Pound makes imports more expensive, which has an immediate and direct impact on Britain’s construction industry – given the extent to which UK firms rely on foreign suppliers.
In the longer term, the construction industry may have to deal with a smaller pool of workers if the free movement of people between the EU and the UK ceases. The industry is particularly reliant on relatively cheap labourers from Eastern Europe. If this supply of labour is cut off, building may become less profitable.
But some construction executives are hopeful that the removal of EU regulations will make construction easier and more profitable. For instance, as it stands, all construction projects in the EU must be completed to ‘near zero’ carbon standard. Such a regulation can significantly increase a construction firm’s cost base, so it’s not surprising that some in the industry have welcomed Brexit.
The process of extracting the UK from the complex, interconnected system of EU laws and regulation will be hugely complex. While Brexit will probably remove Britain’s obligation to comply with EU directives, a great deal of the EU’s laws are already enshrined in UK law. It may take decades to completely deregulate the construction industry to the extent some people want.
One thing is almost certain: as long as such uncertainty exists, investment in property will never be as high as it could be. There are already hundreds of construction projects on hold as a result of the Brexit vote, and until the details of the UK’s new relationship with the EU emerge, many of them will remain that way.
When Will the Slowdown in the Property Market End?
There is a school of thought that concludes the post-Brexit house price slump has yet to begin. Only when we know the finer details of the UK’s new relationship with the EU will property analysts be able to make any meaningful predictions. There was some evidence of a sudden shock to the property market during the days and weeks immediately after the vote, but there are signs that this temporary situation may have already ended.
According to a report from the Nationwide Building Society, the average UK house price rose to a new record level in July 2016 – to £205,715. This was a £10,000 increase on the same month the previous year. And importantly, the same report revealed that house prices rose by 0.5% in June 2016 – the month of the EU referendum.
The demand for homes in the UK continues to rise for now, and is expected to do so indefinitely. However, there is a feeling that the rate at which demand for property is rising could decline, due to what could be several years of uncertainty.
But the Centre for Economics and Business Research has made a bold prediction. They forecast that, save for a short-term dip in London, house prices throughout the UK will continue to rise, despite the shock referendum result. Indeed, the CEBR is predicting that the average British home could be around £40,000 more expensive by 2021. UK house prices are expected to rise by 5.7% in 2016, and a further 2.2% in 2017. These statistics – if they prove to be correct – suggest that any Brexit-related slowdown in the British property market may already be over.
While house prices look set to rise for the foreseeable future, the same certainly can’t be said about the supply of homes. A lot of homeowners are already deciding to delay the sale of their property until the true economic implications of Brexit are known. Compounding the problem is the fact that the share prices of national and multinational construction companies could take a hit following the ‘leave’ vote. This might prompt some house builders to delay – or even cancel – new construction projects.
If homeowners and house builders are being extra cautious during this period of uncertainty, the two factors could combine to actually drive up house prices. For now, the status quo remains, so it is highly likely that property values after Brexit will continue on their upward trend.
How Has Brexit Affected Demand for Homes?
At least in the short term, the domestic demand for homes in the UK looks like remaining relatively strong. Wages are rising, unemployment is falling and the wheels of industry are still turning. With an actual exit from the EU not likely to happen until 2019, the demand for residential property in the regions of the UK should remain strong.
But there are some key milestones to negotiate before we will gain an accurate insight into the future of demand for houses. The triggering of Article 50 will start the clock on two years of negotiations. The UK’s relationship with the EU when this happens could have a direct impact on consumer and business confidence. If the overall economic outlook takes a turn for the worse, the impact on demand for property in the UK could be sudden and dramatic.
It is very likely that, throughout the course of the two-year negotiation process, we’ll hear of key agreements as they happen. Announcements on economic and immigration policies will undoubtedly affect the domestic demand for homes. A failure to agree a free trade deal or come to a universally acceptable arrangement on immigration could spook a lot of house buyers. If this happens, a significant number of prospective buyers might decide to delay their purchase – until the realities of life outside the EU are known.
Perhaps the most surprising development in the UK property market post Brexit is the increase in demand from international buyers. Despite several high-profile announcements from investment banks in South East Asia, Chinese, Korean, Singaporean and Malaysian investors are still keen to snap up property in London. Savvy investors realised that a sudden – yet temporary – panic amongst London property owners and developers gave them leverage in their post Brexit negotiations. The weaker Pound also delivered another hefty discount on pre-vote asking prices.
Of course, the demand for property in the UK is always inextricably linked to the banks’ willingness to lend. There had been fears that a vote to leave the EU would spook the banks and dry up the flow of cash for house buying, but these concerns have largely been assuaged.
According to an article on The Week website, high loan-to-value mortgage ratios for low-deposit buyers have held up well after the vote to leave the EU. And while there has been a modest decrease in the number of 95 percent mortgages on offer, the initial predictions the Treasury was making during the referendum campaign have not yet materialised.
Unfortunately, it seems that first-time buyers are being hit hardest by the ‘leave’ vote so far. Despite interest rates being at record low levels, and monthly mortgage repayments being more affordable than at any time during the last century, young people are going to find it harder than ever to get on the housing ladder. The difficulties facing first-time buyers could hold back demand for property during the months and years of uncertainty that now lie ahead.
Could Brexit Give the Property Market a Boost in the Long Term?
When it comes to making predictions about the post-Brexit UK property market, it seems that opinions are widely divided. According to French bank Société Générale, house prices in London could fall by up to 30% once the implications of Brexit have been felt. They say that the most expensive parts of the capital may be hit hardest, thanks to an exodus of the most talented and wealthy people that many are predicting.
The French bank also believes that the residential property market in the UK could be hit harder than the commercial sector, as large multinationals start to move their operations to EU cities. The exclusive areas of Hammersmith and Fulham, Kensington and Westminster could be hit hardest. While these claims are probably premature and slightly exaggerated, the fact remains that house prices in London are now 12 times the average salary in the capital. And since the banking crisis of 2008 and 2009, property values in London have doubled. Worries about a Brexit-related property crash may be warranted.
A large number of banks, financial services and multinational corporations currently have their European headquarters in London, as it gives them access to deregulated markets and the huge EU free trade area. Take the free-trade element away, and many of these companies might be persuaded to move at least a proportion of their headquarters to EU cities such as Frankfurt, Paris and Dublin. Such a scenario will, of course, lead to a gradual fall in the demand for commercial property in London. But the consequences could be even greater.
A so-called brain-drain from the UK to the EU would likely affect the most expensive properties in central London. A sudden increase in the number of properties for sale in these so-called ‘housing bubble’ areas could lead to some sharp and dramatic price falls. Of course, before the final details of the UK’s new relationship with the EU are revealed, we won’t know exactly what will happen – but this scenario is certainly likely.
The property market’s initial reaction to Brexit involved a sudden fall in asking prices. However, it seems that, for now, things have settled down in that respect. In the months since the vote, house prices across the UK continued rising. Unfortunately, these rises may be more to do with the lack of supply in the market than the prospect of a prosperous post-Brexit Britain.
The Nationwide recently revealed that uncertainty is worrying homeowners – forcing them to delay decisions on the sale of their property. The resultant housing shortage is driving up prices, and possibly tainting UK property market statistics. Sadly for homeowners, this uncertainty will remain until the details of Brexit have been thrashed out.
The long-term health of Britain’s property market will rely on the long-term health of the post-Brexit economy. And this is where things get very complicated. For instance, many critics of the EU point to the fact that cheap labour from Eastern European countries has been driving down wages in Britain for many years. If this access to cheap labour is suddenly cut off, wages at the lower end of the scale could rise over time – giving the cheaper end of the property market a boost.
Of course, access to the free market has helped the construction industry to become more profitable over the last 20 years or so. Cutting off access to labour from the EU could drive up the costs of house building companies, and ultimately reduce the number of new homes being built.
One of the biggest economic concerns surrounding Brexit is the impact it will have on trading conditions with the rest of the EU. More red tape, new tariffs and new trade conditions could affect the bottom line of thousands of UK companies overnight. If this were to happen, both wages and jobs would be hit hard throughout the country. And inevitably, such a scenario would have a knock-on effect on UK property values in the long term.
Should I Sell My House Now or Wait Until after Brexit?
The opinions on whether homeowners should sell their house now or wait until the UK has left the EU are divided. During what will be protracted negotiations, house prices are expected to continue rising – albeit it at a slower rate than before. The uncertainty will leave the property market in a state of flux, and not even the most accomplished of property experts will be able to predict the future with any certainty.
The fact that no one knows how Britain’s economy will react to life outside the EU means a large number of buyers and sellers are delaying their property-related decisions. But it is clear that the initial shock caused by the Brexit vote has passed. Property values remain strong, and the short-term outlook is good. This is a good time to sell a house in the UK.
The cost of borrowing in Britain is at a record low, and this is undoubtedly bringing more buyers to the market. But many banks are reluctant to pass this value on to their customers, given the current uncertainty. There is a very good chance that we will see a base rate of zero before the end of Brexit negotiations, but unless this is reflected in the true cost of buying a home, the effect on the property market will be negligible.
As uncertain as things are now, exactly what the UK economy will look like in five years time is almost impossible to predict. If you’re faced with the binary decision of selling your house now or after the UK has formally withdrawn from the EU, mosts property analysts will tell you to act now. Property values are still healthy, and they’re still rising strongly. Moreover, demand for property in the UK remains buoyant. No one knows how these issues will be affected by the UK’s new relationship with the EU.
What will Brexit mean for London house prices?
When it comes to defining the UK property market, it has to be done by separating London from the rest of the country. London’s property bubble has been nothing short of a global phenomenon since 2010, while house price growth in the UK has a whole has been significantly more modest. Of course, Brexit will have some sort of effect on housing markets throughout the country, but will London feel the effects more keenly?
A senior economist at the Royal Institution of Chartered surveyors recently revealed that house prices were still growing outside London, although the rate of growth had weakened somewhat since the referendum. But he also revealed that there had been some significant price falls in the capital. The supply of homes remains limited, as homeowners bide their time until after Brexit negotiations. Meanwhile, demand is being pegged slightly as anxious buyers put off buying until the Brexit scenario has fully played out.
Interestingly, nearly all of the surveyors questioned in a recent RICS survey revealed they had first-hand experience of house price falls in the capital. In effect, London’s property market is in a state of stasis. As the uncertainty surrounding Brexit house prices continues, so will the reluctance of buyers, owners and developers to do business.
In a recent article from The Guardian, it was revealed that London WILL bear the brunt of a Brexit-related downturn. According to ‘economic indicators’ jobs, prosperity levels and house prices will be hit hard when the true consequences of Brexit start to unfold.
The fact that the capital is being talked about in these terms is a cause for concern for the whole economy – and the UK’s Brexit housing market generally. When the last major downturn hit the UK economy in 2009, the capital was able to ride the storm. In fact, when assessed independently, London never slipped into recession. If economists and analysts are warning of a downturn in London this time around, the consequences for the rest of the country could be devastating.
London relies heavily on its financial services, which could be decimated if large corporations follow through on their threats to move at least a proportion of their operations to EU cities. If this were to happen, tax receipts could crash, and government debt could become a lot more expensive. Such a scenario would have wide-ranging consequences on borrowing for everyone, and, of course, the availability of home loans.
There have already been warning signs regarding the potential effect of Brexit on the London economy. Out of 12 regions in the UK, London was measured as the worst performer on a key business measure during the weeks following the ‘leave’ vote. And according to Lloyds Bank, the capital suffered its sharpest fall in output since the 2009 banking crisis and ‘credit crunch’.
What will all of this mean to the London property market? Well, if multinational corporations and banks do decide to jump ship in order to be at the heart of the new EU, house prices could plummet almost immediately. This is made more likely given what many property experts believe to be the capital’s over-inflated market. Hundreds of billions of Pounds in investment are tied up in London property – a sudden shock could lead to a banking crisis far worse than the one that brought several banks to their knees in 2009.
Of course, the UK’s ability to forge new trading relationships with the likes of China, the USA, India and Australia will mitigate some of the consequences brought about by the damage done to financial services in London. Unfortunately, the capital has become so reliant on this particular sector, any significant damage to it has the potential to decimate the local property market.
Could a post-Brexit housing market push the banking sector towards another crash?
The house price growth that has been recorded throughout the UK since 2009 has been unprecedented. But while the banks now claim to be better protected from the fickle nature of the property market, there are concerns that another crash could prove remarkably easy.
Several years on from the 2008/2009 crash, around 60% of all borrowing in the UK is associated with the purchase of a home. And even more money is tied up in property-related investments. This means that the balance sheets of all our major banks are inextricably linked to the ability of people to make their mortgage repayments.
Imagine a repeat of the scenario that caused the 2009 crash. Many property analysts are predicting that the UK would be hit even harder this time around, as buying a home is now more expensive than it ever was. Indeed, many people are stretching their personal finances to breaking point, simply to get on the first rung of the property ladder.
The ratio between wages and house prices is rising, and it is now at its highest level in history. Any significant shock to the economy – such as the potential shock caused by Brexit – could start a domino effect resulting in huge financial black holes in the balance sheets of our banks. And of course, we all know the consequences of this scenario.
There is a reasonable chance that – at least in the medium term – Brexit will affect jobs and investment in Britain. It might only take a short, sharp downturn to force the property market into crisis. If people’s ability to repay their mortgages and personal debt is significantly diminished, the banks’ exposure could prove catastrophic.
Many economists are now of the belief that it is simply a matter of time before another property-related financial crisis threatens prosperity and the very existence of some British banks. The UK government knows only too well how close we are to another major financial crash, which is why they are taking their time with preparations for the triggering of Article 50. The inextricable links between the property market, the banks and the wider economy in Britain make the need for a sensible, mutually beneficial Brexit deal of paramount importance. The stakes are just too high.
Is Brexit just another issue masking a housing problem a century in the making?
History has shown us that the market alone is incapable of delivering affordable housing in sufficient quantities. Successive governments have been unwilling to temporarily take control of house building away from the private sector in order to improve housing stock and living conditions. Particularly in London, the cost of buying a home is now so high, anyone earning anything like the average wage finds it impossible to get a foot on the first rung of the property ladder.
When it comes to the UK property market, London house prices have always been a special case. During the economically challenged 1920s and 1930s, the capital became an overcrowded city dominated by poverty and slums. It was clear back then that a regional initiative was needed to make the city fit for purpose after World War Two. It was also blatantly obvious that central government and local councils would need to take control of such a wide-ranging scheme to ensure it delivered value for everyone – regardless of their income.
By the 1960s, the capital had been transformed through a series of major infrastructure projects and centrally-funded affordable housing schemes. Now, however, the market is king, and ordinary Londoners have been priced out of most central areas of the city. And despite the fact that Londoners voted to remain in the EU, there was a feeling among many that the current political status quo had to change if life for the majority in the capital was ever going to improve.
Since the vote on June 23rd, the media have – quite understandably – been fixated on how Brexit will affect the most expensive property market in Europe. But many would say that housing has been in crisis for decades. London is currently in the grips of a public sector staffing crisis. The NHS, social services and education are all suffering, as nurses, social workers and teachers just can’t afford the extortionate rents that now define central London’s property market.
But it’s not just relatively low-paid public sector workers who are suffering. Such is the extent of London house price growth since 2009, even entry-level bankers, lawyers and sales executives are now struggling to afford the cost of living in the capital. An increasing number of relatively affluent professionals are being forced to share their home with others or live outside London and pay the the considerable cost of rail travel.
The Brexit debate has, for the last two years, overshadowed what could be a much greater issue in the years to come. The continuing process of urbanisation throughout the world will add another 2.5bn people to city populations by the year 2050. It will take a concerted effort by politicians and international bodies to avert a major living standards crisis in the West. The current policy of letting the market manage our housing stocks is probably not sustainable.
If anything, the house building process has become even more difficult in recent years. Moreover, the publicly listed construction companies that are responsible for the majority of residential house building in the UK are more concerned with share prices than with affordable, quality housing for all. The uncertainty caused by Brexit could exacerbate the issue of short supply, and the rising costs of imported building materials could make the matter even worse. But let’s not forget the UK property market was sleepwalking towards a housing crisis long before David Cameron announced a referendum on the EU.
Despite the huge challenges now facing Britain’s property market, there are possible solutions to explore. Politicians have the power to force construction companies to make more of their developments available to local councils and housing associations. But to do so would reduce profitability and actually act as a disincentive to build. The introduction of subsidies is one possible solution, but this seems unlikely.
At present, neither the British state nor local councils have a policy of strategically acquiring land for house building. Large, publicly-owned construction firms and property developers snap land up with their own commercial interests in mind, and utilise it in the most cost-effective way. But if the government could play an active role in acquiring land, it could add value by granting planning consent based on the housing needs of an ever-changing population. This could generate a huge amount of money for the public purse, which could be used to start growing the social housing stock once again.
Of course, government involvement in markets is an issue of ideology. And given the current political landscape in the UK, this level of involvement by the incumbent government seems unlikely. There have been calls for an apolitical governmental organisation with the principal aims of increasing social housing stock and improving living standards. Until such a body is created, housing will remain a political football without a clear, long-term vision.
For the nurses, social workers, teachers and low-paid workers of London, Brexit has been a major distraction. Ordinary people in London and throughout the UK want affordable, high-quality housing, regardless of the extent to which the UK is involved in the European project. All the ‘Leave’ vote has done for these people is kick the housing can down the road.
What does the future hold for Britain’s property market?
Perhaps the biggest issues to arise in the immediate aftermath of the ‘Leave’ vote related to the impact on Britain’s property market. Almost overnight, there were reports of a sudden and sharp decline in buyer interest. And several real-estate investment funds were forced to impose a freeze on withdrawals in an attempt to stave off a catastrophic run. The referendum result also persuaded many homeowners to hold on to their property until the ramifications of Brexit had become apparent.
Despite several apocalyptic predictions during the days after the vote, disaster was – at least temporarily – averted. It’s very much business as usual in the property market, but this could change in an instant – once the realities of a Brexit deal are known. Moreover, the serious structural problems in the UK’s housing market make it especially vulnerable to Brexit-related shocks.
The recent growth in London house prices has been – in part – down to the increasing significance of the financial markets and the phenomenon of foreign property investment. If this money starts to leave the capital and head to EU cities such as Paris and Frankfurt, the impact on local house prices could be devastating.
According to HM Revenue & Customs, the number of property transactions in July held up well. More good news has come from the Royal Institute of Chartered Surveyors, which commissioned a survey that revealed confidence in the market is still high. But to what extent the Bank of England’s interest rate cut has been responsible for this confidence is not clear.
It is, of course, great news that house prices have held up so far, but there’s a long way to go. Home ownership is now at a 30-year low, as more and more young people are being priced out of buying their own home. Post-Brexit Britain will still have the same structural deficiencies in its property market, regardless of the deal thrashed out with EU leaders. But if jobs and prosperity are adversely affected by the eventual deal, the house of cards that is the British property market could come crashing down.
We can expect the government to have a raft of measures in place to cushion the property market from the effects of Brexit. However, the Conservative administration hasn’t really been able to take effective control so far, and there’s nothing to suggest this will change. The government’s ‘Help to Buy scheme was supposed to help people on lower incomes get on the housing ladder. Instead, David Cameron’s flagship home ownership scheme has driven up both demand and prices yet further – without doing a single thing to tackle the perennial problem of supply shortages.
So far, uncertainty hasn’t been the death knell for Britain’s property market that many thought it might be. But the cold, hard economic realities of a Britain outside the EU free trade area could change all that. If wages and jobs – even temporarily – are hit hard by Brexit, the UK’s banks will struggle, and a recession much deeper and more severe than 2009’s could be the result.
The government has already been taking steps to address the structural problems in the property market. Stamp duty has been raised on buy-to-let mortgages, and tax breaks for investors have been removed. But the effects of these measures before the ‘leave’ vote were minimal. In a more complex and volatile post-Brexit environment, something far more revolutionary will need to be done. After all, if the property market collapses, the wider economy will suffer almost immediately.
According to the Office for National Statistics, the UK’s annual rate of house price growth was 8.3%. In London, the rate was 12.3% – suggesting that warnings of an immediate crash following a ‘leave’ vote were wide of the mark. But these figures are as much to do with the lack of supply in the housing market than the British economy’s resilience where Brexit is concerned. These figures probably suggest that buyers weren’t able to renegotiate existing offers on property. As the average house sale takes up to three months to complete, the true effect of the referendum result will only become apparent in the weeks and months ahead.
Britain’s market for housing is experiencing a highly unusual phenomenon at present. The rate of growth in the demand for houses is now falling, and the supply of houses has been falling for many months. Yet despite these profound issues, house prices continue to rise. This was a situation that had already been playing out before the referendum, but it could be made worse if Brexit has a direct and sudden impact on wages and jobs in the UK.
Brexit should not be allowed to dominate discussions and initiatives surrounding the future of housing in Britain. Overcrowding, soaring house prices and a chronic lack of supply have already changed the way an entire generation interacts with the housing market. This situation developed when the UK was a full member of the EU, but its roots lie in domestic policies and priorities.
Despite the shock of the Brexit vote, first-time buyers still face steeply rising house prices. And because the crux of negotiations with the EU seems to be aimed at ‘business as usual wherever possible’, there’s little chance of Brexit helping future generations with home ownership. The solution to the housing crisis in Britain will be rooted in domestic politics. After all, international property investors and investment groups have their own priorities, and they will continue to manipulate the UK property market for as long as it is profitable.
For many years now, housing in Britain has been viewed in terms of debt, the health of banks and the performance of the wider economy. What seems to have been forgotten is the huge social importance of housing. The ability to buy a home or rent one at an affordable price is directly linked to happiness, wellbeing and productivity – all of which are crucial to the long-term economic success of a nation. So, there really is a financial incentive to make housing in Britain better and more accessible.
Perhaps the question shouldn’t be: ‘How will Brexit affect house prices and the property market in the UK?’ Maybe the question should be: ‘What can we do as a society to create quality, affordable housing for all?’
Image By Furfur – This file was derived from EU Single Market.svg: , CC BY-SA 4.0, https://commons.wikimedia.org/w/index.php?curid=46312833