Using the latest available forecasts, we attempt to uncover the possible effects Brexit may have on house prices.
The Property Market
In May of 2016, George Osbourne told the G7 summit that house prices would fall by 18% in two years if Britain chose to leave the EU. Britain did choose to leave the EU, and in the two years that followed, up to June 2018, house prices rose by 7%. It must be admitted that since then, as we ostensibly move towards Brexit day, property price growth has begun to falter – but even now, with Brexit-induced inertia strangling the life from the property market, draining investors of confidence, average property prices are still rising!
At the end of 2018, the governor of the Bank of England, Mark Carney, then followed up Mr Osbourne’s dismal prophesy with one of his own, claiming that a no-deal Brexit could lead to house prices falling by up to 35%. This claim unsurprisingly sent many a property-owner into panic, envisaging the value of their greatest asset – their home – trickling irrevocably away. Thankfully, however, many of the latest and most sophisticated forecasts are now serving to inject a little much needed realism into the discussion. Throughout this article we will provide an overview of such forecasts with the aim of deflating much of the hysteria surrounding Brexit’s possible effects on house prices.
Deal vs. No-Deal Brexit
The accountancy firm, KPMG, recently released a house price forecast in which it used statistical models to predict the impact of a ‘no-deal Brexit’ vs. a ‘deal Brexit.’ There are, of course, a wide range of possible Brexits – some no-deals may be less extreme than others, some deals may be more favourable than others – but this deal/no-deal binary serves to simplify the situation somewhat and thus enables us to better understand the potential ramifications of each resolution type.
What the model predicted was that, in the case of a deal-Brexit, house prices were likely to stabilise in 2019 and rise to 1.9% in 2020; and in the case of a ‘no-deal Brexit,’ property prices were likely to fall by between 5.4% and 7.5% in 2020 depending on the region. The authors of the report did, it must be said, indulge in some speculation as to what an absolute worst-case scenario no-deal Brexit might look like, wherein everything that could go wrong – such as a global recession – did, and what they concluded was that if this dystopia were to materialise, property prices might fall by upto 20%. There are, however, plenty of good reasons as to why this is unlikely to occur.
Since the 1990’s the UK’s housing market has suffered two major house price corrections. One of these took place between 1989 and 1991, when house prices fell by 20%, and the other took place during the financial crisis of 2008, when house prices also fell by 20%, though this time within a 16-month period. One persuasive reason for optimism at this particular juncture is that a number of the conditions that worked to produce these precipitous declines are not currently present in the UK’s present-day housing market. For one, the house price to earnings ratio is currently substantially lower in most regions of the UK than it was during the 2008 financial crisis; and additionally, current interest rates are significantly lower than those that prevailed in 1989, when the bank of England’s base rate was 13.88%. These benign market conditions mean that average monthly mortgage payments are now significantly lower than they were during either of the two most recent house price crashes, providing the market with an additional element of stability than it had at either of these times.
The Office for Budget Responsibility (OBR) has also dedicated a good deal of energy and brain power to the task of forecasting Brexit, and their models have yielded very similar results to those produced by KPMG. Back in March, when the odds of a no-deal Brexit seemed vanishingly small, the OBR attempted to forecast the economic effects of a smooth Brexit. Their models suggested that in such an event, house prices were likely to fall very slightly in 2019, before rising steadily until they reached a consistent growth rate of around 4%. Ultimately, they expected house prices to grow by 17% between the fourth quarter of 2018 and the first quarter of 2024, when their forecast ended.
This forecast provided some cause for positivity, but then in July, on the back of Boris Johnson’s announcement that the UK would leave the EU without a deal if need be, the OBR set about producing forecasts for a no-deal scenario. Their models suggested that in the event of a no-deal Brexit house prices were likely to fall by around 10% between the start of 2019 and mid-2021, before recovering a little but ultimately ending up 13% lower than the forecast that had been generated for a smooth-transition Brexit.
The conclusions each of these reports reaches is clear: if our politicians are able to achieve a deal – still the more likely outcome of the two, though the when and how remain to be seen – and we are able to depart from the EU with minimal disruption, then house prices are likely to continue ratcheting steadily upwards at much the same rate as they would have had we chosen to remain within the EU. If, on the other hand, we leave the EU without a deal, then the outlook for the property market becomes less clear: in the short-to-medium term, house prices are likely to take a hit, but in the long-run, the property market is expected to recover to the extent to which our politicians are able to plot a path through the post-Brexit unknown. If they are successful in this endeavour, there’s every reason to believe that we will return to the happy upward trajectory that we enjoyed before the term Brexit had even been coined.
It’s impossible to argue that house prices will remain unaffected by a no-deal Brexit; what we can say, however, is that when we consider the topic in the cold light of statistical analysis, much of the doomsday talk seems fanciful and unwarranted. We are, after all, still in the midst of a housing shortage, and until this shortage is remedied, the imbalance of demand to supply is likely to exert a continuous upward pressure on house prices that will outlast any short-term swings in confidence resulting from Brexit.
Your home may be repossessed if you do not keep up with repayments on your mortgage.