How will Brexit affect the housing market in the UK?

The arguments from the ‘Leave’ and ‘Remain’ camps have been flying backwards and forwards for weeks, with only a few days left until the all-important vote.

 

But, crucially, how would Brexit affect the housing market? The Chancellor, George Osborne, has said that a UK vote to leave the European Union would cause an "immediate economic shock" that could stunt any growth in house prices. He added that by 2018, houses could be worth up to 18% less than if we vote to remain.

He believes that this immediate economic shock will hit financial markets for an unknown period of time, giving us no clue as to what the future will look like.

He added: "In the long term, the people in our country are going to be poorer, which affects the value of their homes. At the same time, first-time buyers are hit because mortgage rates go up, and mortgages become more difficult to get. So leaving is a lose-lose situation".

Estate agents in the UK believe that Brexit brings with it two scenarios, neither of which is good for the current property market. The first is that overseas buyers will see the market falling and may decide they would prefer to live in other European cities. Wealth preservation and lack of investment growth are destined to be with us as long as interest rates stay low e.g. for the foreseeable future.

 

Not only will new buyers be put off, but those who have invested over many years in London may see a decrease in sterling as a precursor to taking profits on property investments and leaving. The money that the wealthy have brought to London cannot be overestimated. Once that leaves the capital, it could take decades to build it up again.

The second scenario is that if we leave, sterling would collapse so far that the only way to protect it would be to raise interest rates. Clearly, after so long in the current environment and with little warning, the effect of this would be dramatic.

These same estate agents believe that many baby boomers will vote with their head and stay in, even though their heart may feel they should leave, because the chaos following an exit from the EU would threaten the value of their homes. If the ‘Remain’ camp wins, the boost in the markets could make up for all the instability of the past two years.

However, the global ratings agency Moody’s has said that first-time buyers would benefit from a vote to leave the EU, because a fall in house prices would make it more affordable for people trying to get on to the property ladder for the first time.

And according to a recent report by the bodies that represent the UK’s estate agents and landlords, the National Association of Estate Agents (NAEA) and the Association of Residential Letting Agents (ARLA), Brexit would cut levels of immigration and reduce future price rises, leaving the average UK house worth £2,300 less in 2018, and £7,500 less in London. These bodies believe that rent bills are likely to fall if Britain exits the EU and that property will therefore become more affordable to first-time buyers.

Possibly boosting the ‘Leave’ campaign, NAEA and ARLA report estimates that the population of the UK will be 1 million less than projected by 2026, if Brexit does happen, decreasing the demand for buy-to-let properties.

They say that an out vote “could provide first-time buyers with breathing space as demand for housing eases off”. But they also warned that Brexit would hit the construction industry hard, jeopardising plans to build more houses.

Mark Hayward, the managing director of the NAEA, said: “An out vote could mean that in 10 years’ time we’d find ourselves with a severe skills shortage of construction workers. So even if we then had planning permission, investment and materials to build more housing, we simply wouldn’t have the resource to put the bricks and mortar together. It has the potential to have a very damaging effect on the future housing market.”

The NAEA says that one in 20 workers in Britain’s construction industry were born in non-UK EU countries and they are vital to plug the skills gap. The NAEA and ARLA, which together have approximately 15,000 members, have refused to endorse either the ‘Remain’ or ‘Leave’ camps, as their members are apparently still split on the issue.

As for the property market in London, the NAEA/ARLA report claims that this would be particularly badly affected by Brexit. It said that in 2013, 17% of overseas buyers in London’s prime property market were EU nationals.

The report goes on: “The impact of the market uncertainty is especially pronounced in the London market, as property in the capital has often been considered a safe haven investment. London may lose that status if it enters an extensive period of figuring out its economic and political standing post-EU membership”.

Recently, Christine Lagarde, the MD of the International Monetary Fund, also warned that leaving the EU would result in “sharp falls” in house prices and on stock markets.

But David Cox, the head of ARLA, said that buy-to-let landlords may still leave the market en masse following a Brexit vote.

He said: “The fact that rent costs would face downward pressure is both a blessing and a curse. While renters should face fair and reasonable prices, landlords need to be able to at least break even on any outgoings they have, such as a mortgage. If demand eases to such an extent that landlords cannot recuperate costs, we’ll likely see a mass exit from the market, which would then just have the opposite effect on demand as supply falls – and we’d be back to square one.”

In London, commercial property has in fact already been affected by the ongoing uncertainty over a Brexit vote. Guy Stephens, of wealth managers Rowan Dartington Signature, said: “Investors are withdrawing from the sector, not in anticipation of imminent recession, but more as trepidation sets in ahead of a potential Brexit.”

He added: “Who would want to commit to a longer-term construction project when the economic outlook could change dramatically if we choose to leave the EU? In addition, there may be voids in prime office locations in London from businesses engaged in financial services or, at the very least, investors will become cautious of tenant demand, should we choose to exit.”

Yet a young first-time buyer writing in the Spectator recently said: “It is about time that younger people were brought into the discussion, and I think Osborne has, inadvertently, hit upon something that could engage us. Having found the debate fairly uninspiring so far, I have yet to decide which way I will vote. But if Brexit would end the way the housing market is rigged against the young, then it may just be the only chance my generation will get to level things out.” 

Guardians of London’s personal view is that leaving the EU is a dangerous move. Interest rates are likely to go up faster if we leave and this will have a hugely negative effect on the average property owner. But who knows? In just a few days’ time, we’ll find out for sure, one way or another.

Article source: Guardians of London