In May 2016, George Osborne told the G7 summit in Japan that house prices in the UK would fall by up to 18 per cent over two years if Britain voted to leave the EU. The International Monetary Fund (IMF) agreed that “sharp drops in equity and house prices” could follow a Leave vote.
They were wrong; house prices rose, on average, by just over 7 per cent between June 2016 and June 2018.
However, as the prospect of a hard or no-deal exit looms, these predictions have returned. In July, the Office for Budget Responsibility (OBR) published its 300-page Fiscal risks report 2019, in which it warned that a no-deal Brexit could leave house prices 10 per cent lower within two years and 13 per cent lower by 2024. The OBR’s scenario is based on the “stress test” devised by the IMF to model the impact of no deal on the British economy.
This looks less like Project Fear than Osborne’s prediction, partly because the OBR isn’t campaigning in a referendum and partly because the model used by the OBR was actually the more optimistic of two impact assessments offered by the IMF. A more pessimistic report, issued last month by KPMG, predicts a drop of up to 20 per cent.
The Financial Conduct Authority (FCA) also appears concerned about what a major economic event might mean for Britain’s hissing property bubble. This week, it announced changes to its rules “to reduce the potential for harm to investors in funds that hold inherently illiquid assets, such as property”. The new rules will require an investment fund to stop dealing if “stressed market conditions” lead to “material uncertainty” over the value of its assets.
Even the Daily Express, that archetype of cool-headed economic analysis, has offered its readers (apparently without irony) the advice they need to “sell your house in 30 days and avoid nationwide no-deal price crash”.
Andrew Burrell is the chief property economist at the independent economic research company, Capital Economics. He points out that the housing market has already flattened or fallen to varying degrees across the country, and for reasons that are not directly Brexit-related: “It’s just a matter of 30 years of falling interest rates, people taking out bigger and bigger mortgages – you’ve now reached the size where it’s probably about as big as we can manage.”
A no-deal Brexit, says Burrell, “will make a difference – things will be worse – but the general view that we have is that it will probably hit transactions more”. Buyers and sellers will be more nervous. “You’ll go from a flat market to people completely holding off. But we’re already expecting prices to fall this year, particularly in London. They have been falling for some time.”
Burrell also predicts that the government will introduce measures – “an interest rate cut, and probably a pretty sizable fiscal stimulus… that would offset some of the negatives. I think there would be a economic shock, but it would be temporary”.
However, Burrell adds that “one thing we don’t see is the ‘Brexit bounce’” – the idea put around by some economists that the certainty of having left, with or without a deal, will put house prices back on the upward track. “People are borrowing large amounts of money, their incomes aren’t growing very much, and prices are very high relative to earnings”, he explains. “All of those things are weighing on the market.”
But while the bloated market will rein in house price inflation, a real collapse in value would actually be more likely if the economy were in better shape, Burrell says. “In the past, it has usually been to do with some pretty dramatic interest rate shock. So, we’d have to have a period of strong growth, a bit of inflation, and then sharply higher interest rates. At the moment, that’s just not in prospect.”
There is one way in which a no-deal Brexit will make homes cheaper, for some people. A big dip in the value of the pound would reduce property prices in the UK for foreign buyers, regardless of whether asking prices moved. And as rents – which are more closely related to demand than house prices – are expected to remain high or increase, a no-deal Brexit might make Britain’s property market more tempting for overseas investors.
London has already seen a greater appetite from foreign buyers since the referendum, and sterling’s depression has only increased demand. China’s biggest seller of foreign property, Juwai.com, recorded that enquiries for properties in Britain tripled last year, and not only in the capital – the steepest rises were in the North and the Midlands.
However, the influence of foreign buyers will not decide the direction of the whole market. And the government has already done pretty much everything it can think of to inflate house prices; it is hard to see Boris Johnson and Sajid Javid’s recent dalliance with the idea of scrapping stamp duty, or shifting it to sellers rather than buyers, as anything other than a rummage at the back of an ideas cupboard that is increasingly bare.
As Andrew Burrell points out, the biggest factor affecting the UK’s housing market is the simple fact that people can’t afford houses. “There’s no way interest rates can get much lower, so people can’t borrow much more, and earnings are not growing very rapidly.” Deal, no deal, or no Brexit at all, this does not look likely to change.