What is the impact of Brexit on house prices?

The future of the UK after Brexit is more uncertain than ever and, with the housing market already feeling the pressure, many fear leaving the European Union could lead to the collapse in house prices.

UK and EU flags
Source: Bloomberg

Won’t it be refreshing to focus on key housing issues without Brexit poking its nose in every five minutes? – Property investment management firm JLL.

The long-standing problems within the UK housing market have been pushed aside over the last couple of years. The issues surrounding chronic shortages of new houses, sky-high rents and unaffordable deposits have all been put on the backburner while the UK government is consumed by Brexit and are unlikely to be seriously addressed, like most policy areas, until some form of clarity over the future relationship between the UK and the EU is established.

Read more: What are the pros and cons of leaving the EU?

That has not prevented Brexit from having an impact on the market, with some forecasts sparking fears it could induce a collapse in housing prices. Others argue it wouldn’t be a crash but a correction after a decade of surging house prices that have made them more unaffordable than ever for first-time buyers.

Read more: What are the dynamics of the UK housing market slowdown?

With uncertainty high and the foundations weak, we have a look at how Brexit has impacted UK house prices so far and what it could all mean for the housing market once the UK leaves the EU.

What effect is Brexit having on house prices?

UK house prices have continued to grow over the last few years, but growth has slowed significantly since the EU Referendum. The average price in September was £232,554, having grown 3.5% over the preceding 12 months. Although the fastest growth recorded for six months, the rate was slower than the 4.6% recorded a year earlier and less than half the 8.2% growth over the year to June 2016 (when the Brexit vote was held)1.

Average UK house prices chart

More recent data from the Halifax House Price Index, the longest-running tracker of UK house prices, suggests that November was the worst month for growth in six years. The report said house price growth in the three months to November was just 0.3% versus 1.5% a year earlier, hitting the slowest rate since December 2012. That is supported by the latest monthly survey by the Royal Institution of Chartered Surveyors (RICS) that shows the net balance of new buyer enquiries deteriorated for the third consecutive month in October, partly because houses remain unaffordable, 'political pressure' and a lack of new houses being put on the market.

The Halifax data reveals the amount of houses up for sale is currently at its lowest levels since September 2013, a sign of reluctance among homeowners to sell up. Yet, it shows data that contradicts the RICS survey by stating mortgage approvals in October hit 67,100 – up 2% month-on-month and only the third time it has breached the 67,000 mark in the last 18 months – signalling buying activity is on the rise despite low availability. Mortgage approvals are currently running above the monthly average over the last five years of 66,600. Approvals will have undoubtedly been helped by high levels of employment and the fact wages are finally starting to rise at a faster pace than inflation (albeit not by much).

Furthermore, data from Her Majesty's Revenue and Customs (HMRC) shows the number of housing transactions had been on a downward trend during the second half of 2018 before making a notable jump in October to almost 12,000 compared to 10,000 in September2.

UK house transactions volumes

Additional data from estate agent Rightmove shows stock levels remain low, at just over 50 properties for sale per estate agency in October. Average selling times have wavered over the last year, ranging between 56 days to 72 days3.

Average housing stock and sales time

How did the Brexit vote affect UK house prices?

The rate of growth has differed across the UK. While house prices in Wales and Scotland have risen at a faster rate since the referendum the opposite has been true in England and Northern Ireland, where growth has almost halved.

Read more: UK house price slows to new low in August

In the two years leading to the Brexit vote, house prices in England and Northern Ireland had risen by over 15%, but both have slumped closer to 8% over the last two years. Meanwhile, house price growth in Wales has accelerated from 7.7% to 11.8% and Scottish house prices have risen by 8.8% compared to 5.1% 4.

Average UK house prices across the UK

Severe slowdown in house price growth in London and East of England

Although England’s house price growth has largely outperformed other members of the UK over the past ten years and was the fastest-growing region in the two years leading up to the Brexit vote, the country is now experiencing the slowest rate of growth across the whole of the UK. That is significant as the country accounts for 85% to 90% of all housing transactions across the UK.

Breaking down the figures for England further, it is clear that the severe slowdown has been predominantly caused by the East of England and London, with house prices in the capital actually declining 0.3% over the past two years. Still, every region of the country has seen growth slow since the Brexit vote, apart from the North West and East Midlands, and that growth has only accelerated by a fraction 5.

House price growth slows in most regions of England since Brexit vote

UK RICS Residential Market Survey shows Brexit hurts outlook

'Looking ahead, near-term price expectations remain modestly negative at the headline level, while the outlook for 12 months ahead is now broadly flat. Respondents in London and the South East continue to return a negative assessment on the prospects for house prices over the coming year. Conversely, 12-months price expectations are still elevated in the North West of England, Northern Ireland and Scotland' – RICS, October 2018.

The latest RICS Residential Market Survey suggests sentiment in the market is subdued and points toward a rather stale outlook for house prices, stating near-term price expectations remain 'modestly negative' overall, while the outlook for the next 12 months is 'broadly flat'. Supporting other data demonstrating the price growth pressure in London and the South East, the survey says the market expects prices to decline over the coming year while expectations in the North West of England, Scotland and Northern Ireland are more buoyant.

The survey also highlights the struggle to attain asking prices for the highest-priced properties, with 75% of all properties with a £1 million-plus valuation being sold below the price tag in October. Plus, higher-tier property sellers have dropped their prices with 14% (up from 10% the month before) slapping an asking price that was at least 10% lower than the initial asking price. It is a similar but less severe problem for sellers of properties worth up to £500,000 (the bulk of the market), with over one-third of houses sold in October coming in up to 5% below the asking price. Still, just over half secured offers at least in line with the price tag.

How would a ‘soft Brexit’ impact house prices?

JLL’s latest house price forecasts have been based on a Brexit deal being agreed and a transition period running to 2020. Importantly, JLL’s estimates are based on a ‘soft Brexit’ whereby the UK continues to embrace the four freedoms of the EU but has no say in policy making during a transition period. The other 'most likely' scenario considered sees the UK and the EU trade on World Trade Organisation (WTO) rules – like under a no deal – but after both have had time to adapt under the transition period rather than a ‘cliff edge’ Brexit that would see the pair trade on WTO terms as of 29 March 2019, when the UK formally leaves the EU. The transition period is therefore central to JLL’s forecasts.

JLL house price forecasts

Now 2019 2020 2021 2022 2023
UK house price growth 3% 0.50% 1% 3% 3.50% 3%
UK housing transactions 1.20m 1.15m 1.18m 1.23m 1.28m 1.32m
UK housing starts 179,000 175,000 180,000 185,000 195,00 205.00

These estimates, like all Brexit-related forecasts, should be treated lightly. JLL currently expects an upturn in 2019 but admits a worse-than-expected deal, prolonged economic weakness or a no deal – Brexit could dramatically change its figures.

How would a no deal Brexit affect house prices?

One of the starkest warnings over Brexit has come from the Bank of England (BoE), which has warned the worst-case ‘no deal’ scenario has the potential to plunge the UK into a deeper recession than the financial crisis a decade ago. This would include a severe hit to house prices that could lose up to one-third of their value. Some in the market believe this would help open up the housing market to struggling first-time buyers but they would be presented by a new problem if this happened, as interest rates would rise to as high as 5.5% (from 0.75% now) in order to counter Brexit-induced inflation. It is known that interest rates are set to rise over the forthcoming years regardless of how Brexit pans out, but exactly what Brexit deal the UK gets will make a marked difference in how much higher rates go.

Read more: Was the property cycle behind the financial crisis?

BoE Brexit forecasts

GDP Unemployment Inflation House prices Commercial property price Interest rates over first three years Peak interest rates
'Disruptive' Brexit -3% 5.75% 4.25% -14% -27% 1.50% 1.75%
'Disorderly' no deal Brexit -8% 7.50% 6.50% -30% -48% 4% 5.50%
BoE 2018 Stress Test -4.75% 9.50% 5% -33% -40% 3.25% 4%
Global 2008 financial crisis -6.25% 8% 4.25% -17% -42% 2% 5.25%

Interestingly, house prices are expected to hold up much better than commercial property whatever the outcome, according to the BoE.

Read more: How is UK commercial property performing and how will Brexit impact prices?

Governor Mark Carney has said the BoE is advising prospective house buyers to be 'prudent' because anyone taking out a mortgage in the next few years will, at some stage during the life of the loan, see conditions become 'difficult'. He has stressed buyers need to consider job security, wage growth and interest rates over the average 25-year life of a mortgage and not just the forthcoming years.

Read more: When is the next BoE meeting and what should you expect?

The headlines have said the BoE’s predictions point towards a crash in the housing market. While a drop of one-third is severe, these warnings have ignored the surge in prices over the last decade that has seen the average cost of a home jump by 35.5% since September 2008. UK house prices have been outperforming the rest of the European Union over the last few years: Eurostat shows the UK House Price Index (HPI) rose to 114.92 in the second quarter (Q2) of 2018, from 104.16 in Q1 of 2016, compared to the wider European Union (excluding the UK) HPI that rose to 112.67 from 101.83. Still, the BoE’s warning under a no deal Brexit suggests that the rampant rise in house prices during the last ten years could be largely erased under a no deal scenario.

Read more: What does the first UK rate rise in ten years mean for investors?

What will happen to house prices after Brexit?

'Sentiment is exposed to how Brexit negotiations proceed and, specifically, the perception of what the outcome will mean for household finances. While this all remains unclear, do not expect any great movement in house prices or market activity at a national level' – Savills.

Savills, the London-listed global estate agent, concedes the uncertainty from Brexit makes predicting the future of house prices difficult, but takes a more upbeat view than most in the market. For example, it argues that the BoE 'almost apocalyptic' prediction for house prices under a no deal scenario is 'highly unlikely' and that the long-term outlook depends more on household finances rather than house prices.

Virtually, all Brexit predictions surrounding the UK gross domestic product (GDP) suggest the country will keep growing under any scenario but at a slower rate than what the country would experience if it stayed in the EU. The same seems true for house prices, with Savills predicting values could rise by nearly 15% over the next five years.

Savills mainstream UK house price forecast

2019 2020 2021 2022 2023 5-year compound growth
UK house price forecast 1.50% 4% 3% 2.50% 3% 14.80%
North West 3% 6% 4% 3% 4% 21.60%
Yorkshire and Humber 2.50% 5.50% 4% 3% 4% 20.50%
Wales 2% 5.50% 4% 3% 3.50% 19.30%
East Midlands 3% 5% 3.50% 3% 3.50% 19.30%
West Midlands 3% 5% 3.50% 3% 3.50% 19.30%
Scotland 2.50% 5% 3.50% 2.50% 3.50% 19.30%
North East 2% 5% 3.50% 2.50% 3.50% 19.30%
South West 0.50% 3.5% 2.50% 2.50% 3% 12.60%
South East 0% 2% 2.50% 2% 2.50% 9.30%
East 0% 2% 2.50% 2% 2.50% 9.30%
London -2% 0% 2.50% 1.50% 2.50% 4.50%

Again, the picture is mixed across the UK, with London prices set to see considerably slower growth over the coming five years compared to the rest of the UK, with prices set to fall or stagnate until at least 2021.

Prime property values are also forecast to grow at rates below the national average, with properties in central London to grow 12.4% over the next five years, slower than expected growth in prices of prime property outside of the capital and in Scotland.

Savills prime capital value forecast

2019 2020 2021 2022 2023 5-year compound growth
Prime central London -1% 0% 6% 2% 5% 12.40%
Other London -1% 0% 3.50% 1% 3.50% 7.10%
Suburban -1% 0% 3.50% 1.50% 4% 8.20%
Inner commute 0% 0% 3% 2% 4% 9.30%
Outer commute 0% 0% 3% 3% 4.50% 10.90%
Wider South 1% 2% 3% 3.50% 4.50% 14.80%
Midlands/North 2% 2% 3% 3.50% 4% 15.30%
Scotland 2% 2% 3% 3% 3.50% 14.20%

How will higher interest rates impact UK house prices?

'From 2021, we expect the Bank of England base rate to rise from 1.5% to 2.75% by the end of our forecast period. This is unlikely to be a problem for those households already paying their mortgage. But, assuming it remains unchanged, a 3% affordability stress test for new buyers will start to impinge on the amount people can borrow relative to their earnings' – Savills.

One of the main reasons why Savills expects house price growth to be more constrained going forward (outside of Brexit-related pressures) is affordability: if buyers can’t afford housing then sellers can’t offload their properties. This is primarily because higher interest rates are on the horizon, making mortgages more expensive.

Interestingly, the estate agent does not expect the large lifts in rates to cause problems for those already on the property ladder, but for those trying to get on it. Currently, it is well accepted that many aspirational first-time buyers can largely afford the mortgage repayments on offer but struggle to gather a deposit together at a time when house prices are so high (hence why government subsidy schemes were introduced). But Savills predicts higher rates would raise another barrier for first-time buyers who, when their finances are tested to see if they can cope financially with higher rates, will be able to borrow less relative to their earnings. It believes this problem will hinder demand and therefore limit price growth in London and the South East in particular.

How has Brexit impacted the investment case for UK housing?

The UK government has been deterring investors in the UK housing market over recent years, mainly through hikes in stamp duty and the introduction of a less favourable income tax regime that has weighed on profitability. Figures from JLL show the amount of loans made to Buy-to-Let landlords plummeted 46% between the referendum in June 2016 to July 2018. Developer Berkeley Group said the 25% drop in pretax profit in the six months to the end of October was due to political uncertainty and the changes to taxes, noting a heightened effect in London.

Read more: Should you invest in a buy-to-let or put more money into your SIPP?

That supports government data that shows Help-to-Buy now makes up over 40% of all new houses being sold and the financial results of a number of housebuilders that have been driven by the scheme.

Telford Homes, which focuses on average houses (in terms of price) in London, said earlier this year that the high prices in the capital (which often exceed the Help-to-Buy cap of £600,000) meant sales were falling. Further demonstrating the industry’s reliance on the government scheme, Barratt Developments revealed over 40% of its sales in year to the end of June were supported by the Help-to-Buy scheme while the figure at Persimmon was even higher at 60% in the first half of 2018. The amount Persimmon was earning from government subsidies was a key reason why there was outrage over the excessive pay packet of its boss Jeff Fairburn (the highest of all chief executives last year), leading to his resignation earlier in 2018.

How has Brexit impacted rates of rent for UK housing?

Slower price growth, subdued lifts in rents and higher costs have all hurt investor appetite for housing. The rise in rents has subsided since the referendum, growing at a 12-month run-rate of just 0.9% in October compared to 2.5% at the start of 20166.

Private housing rental price index

JLL’s soft Brexit forecasts suggest UK rental growth should tick upwards to 1.5% in 2019 before steadily climbing to annual growth of 2% in 2020, 2.5% in 2021, and then 3% per annum in 2022 and 2023. Alternative forecasts from Savills suggest rents will grow by 1% in 2019, 2% in 2020, 3% in 2021 and 3.5% per annum in 2022 and 2023. Both expect rents in London to grow at a slower rate than the wider UK.

Read more: ‘Significant upside’ for UK housebuilders if Brexit woes improve

The direction of rents obviously holds consequences for tenants and some expect a more drastic rise over the coming years. The National Association of Estate Agents (NAEA) and the Association of Residential Letting Agents (ARLA) joint Housing 2025 report expects affordability issues to constrain first-time buyers and therefore push up demand for rented properties, leading rents to 'sky-rocket'. The report forecasts home ownership will fall by 7% by 2025 while the number of people renting will shoot-up by 9%. However, the report is considerably bullish in areas where others are not – including a forecast that average house prices will rise by a staggering 50% by 2025 with prices in London to nearly double.

UK housebuilder share prices: how have stocks performed amid Brexit?

The sentiment surrounding housebuilders can be an indication of the longer-term confidence investors hold in the market, particularly the expectations for new homes being built and the price they can be sold for.

Read more: UK housebuilders under pressure

The FTSE 350 Construction & Building Materials Index has lost over 10% since the Brexit vote, but virtually all the London-listed housebuilders are still trading higher now than they were at the Brexit vote (although many experienced sharp falls in the run up to the referendum). However, a definitive trend has emerged over the last year that has wiped billions off the sector’s value, with many having seen the falls in their share prices accelerate over the last six months.

UK housebuilders start to feel Brexit pressure
Since Brexit vote 12 months 6 months 3 months
FTSE 350 Construction Index -10.6% -24.9% -31% -22.6%
Persimmon 22.60% -27.40% -32% -18.70%
Redrow 35.60% -24.10% -21.10% -19.10%
Crest Nicholson -24.40% -36.10% -24.30% -9.60%
Barratt Developments 2.50% -26.30% -20.0% -16.30%
Taylor Wimpey -3.40% -34.30% -29.30% -20.20%
Berkeley Group 24.60% -18.50% -22.0% -6.20%
Bellway 21.20% -28.70% -24.60% -12.10%
Bovis Homes 9.40% -24.10% -31% -23.40%
MJ Gleeson 27.10% -10.70% -12.90% -6.90%
Telford Homes 0.50% -27.10% -30.20% -27.30%

(Correct as of December 10, 2018)

Should you buy a house after Brexit?

'If you bought now, you might worry that your home could drop in value. But if you’re going to be there for five or ten years it shouldn’t make too much difference, as the market could well correct itself by then… If you’re considering buying somewhere for the short term, it’s more complicated' – Kate Faulkner, founder of propertychecklists.co.uk

The attraction of the UK housing market for those looking to deal in property as an investment has dwindled since the referendum result but government schemes, tight supply and geographical pockets of growth are still providing the opportunity. Plus, the argument for rental growth, although subdued now, looks strong, based on the consensus that the amount of new housing to enter the market will remain low while house prices continue to rise.

But, at the bottom line: no one knows what Brexit will mean for the country, let alone the housing market. Although wages are outpacing inflation, they are still somewhat stagnate and owners will certainly be faced with higher interest rates over the coming year. Affordability, Brexit or no Brexit, is the biggest problem for first-time buyers that are used to seeing their chances of buying a home dashed because prices are rising faster than they can gather a deposit together – the use of the government’s Help-to-Buy scheme is testament to that.

Read more: How to build a portfolio of bonds, commodities and property

However, for those concerned about buying a home as a home (rather than an investment they hope to sell in the coming years), confidence should remain high. Prices may come under pressure in the short term but the average house is highly likely to be worth more in ten years than it is now, regardless of Brexit. Instead of focusing on prices and growing the value of such an investment, hopeful buyers should concentrate on ensuring they can afford a mortgage over its lifetime: testing they can manage higher interest rates, losing their job or a full blown financial crisis.

Brexit

Find out what Brexit could mean for the markets and how a hard or a soft exit from the EU could affect traders.

Sources:

  • 1. ONS
  • 2. HMRC
  • 3. Rightmove
  • 4. ONS
  • 5. ONS
  • 6. ONS

This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.

Find articles by writer

Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 81% of retail investor accounts lose money when trading spread bets and CFDs with this provider. You should consider whether you understand how spread bets and CFDs work, and whether you can afford to take the high risk of losing your money. Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage.