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Now it’s official, what does Brexit mean for UK house prices?
March 29, 2017Article by Paul Avery
Accession to the EU used to be one of the clearest signals for property investors to BUY, BUY, BUY! New and aspiring member states have served up successive frenzies of speculation, moneymaking, and frustration over the years.
But now we face the flipside of this challenge: how should property investors respond to the UK’s formal intention to leave the EU?
It would be wrong to reverse engineer the problem and expect leaving to cause a market contraction simply because joining coincided with so many property booms (see: Ireland, Poland, Bulgaria, etc.). Accession to the EU did not magically create those booms from nothing; the economic and social trajectory of those countries simultaneously qualified them for accession and primed their property markets to be unlocked (or supercharged) by EU membership.
The reverse does not apply here. The UK has not regressed to the point that it no longer merits membership. Quite the opposite: Britain has one of the strongest economies and most respected civil societies in Europe. It has chosen to leave, an unprecedented move with unpredictable consequences.
In this uncharted context, what can be said about the future of the UK property market?
First thing’s first, today’s activation of Article 50 should have no direct or immediate consequences. Consensus even suggests that this largely symbolic moment had already been priced in to the ever-jittery value of the pound (FT).
As for the longer-term effects on the housing market, there are many complicated and intertwined dynamics at work. Any respectable prediction must contend with future economic growth, inflation, employment (including migrant labour), consumer confidence, interest rates, currency movements, sovereign credit ratings, and a host of other factors. These largely depend on how the negotiations proceed, and today’s cooperative tone from Theresa May was a strong first step.
What we know about the economy since the referendum is also encouraging. GDP increased by 0.7% in Q4 last year, surpassing estimates (ONS), respectable growth of 1.8% is expected in 2016 (ONS), the FTSE is way up (mostly due to the cheap pound), inflation is growing but not as fast as wages (BBC), and consumer confidence has been extremely resilient, though it may be peaking (FT). If this pattern of surpassed expectations holds, the property market could well regain its usual momentum sooner than we think.
(It is especially important to watch interest rates and inflation going forward: when both remain low they encourage home buyers and drive up prices.)
Uncertain about uncertainty?
Periods of uncertainty tend to reduce transaction volumes as people are put off big decisions, like buying a home. The question is whether Article 50 puts an end to the uncertainty unleashed by the referendum or represents a two-year extension of it. Opinions will likely differ on this point.
One certainty is that house prices will continue to obey the laws of supply and demand, and the UK’s widening shortfall can be relied upon to support current valuations at the very least. YOPA’s house price tracker, which aggregates predictions from various industry bodies, gives an average forecast of 1.2% growth in 2017. Nationwide and Rightmove project 2%, RICS says 3%, and only one outlier expects a decline.
According to the Halifax, house price growth accelerated in February and now stands at 5.1% above the same period last year. Though they may no longer be rocketing, we would be shocked to see the market decline anytime soon. House building recently fell to a six-month low because of rising import costs, and could be dampened by labour pressures in future.
As always there will be no blanket effect over the entire country. Looking a little closer, it is reasonable to expect the slowdown in London to persist, pockets of regional prosperity to thrive, and export-heavy manufacturing hubs to falter. In her speech today, the PM indicated that devolved regional powers will be strengthened post-Brexit, which suggests northern secondary cities are sensible targets for investment.
On the subject of regional competition, the effects of Brexit will surely reverberate beyond Britain’s borders. That is both bad and good: the EU will be weakened by the loss of its departing member, but cities across the continent are competing for business relocations and investment. Commercial real estate in Paris and Frankfurt, residential property in Berlin, and a few other pockets deserve the consideration of non-sterling denominated investors.
Yet a recent surge of investment commitments in the UK from China, America, and the Middle East run deeper than the short-term currency play. The fundamentals of the British economy and property market continue to repay long-term confidence. That bears remembering in what are sure to be interesting times ahead.