Ghosts in the machine: housing and commercial property are battling headwinds. David de la Mano/Flickr, CC BY-NC-SA

Property fears after Brexit vote are a sign of wider UK housing problems

Immediately after the UK voted to leave the European Union, a number of lead economic indicators went into reverse. Notable among them were housing, property and real estate shares that fell sharply both in the housebuilding sector and among banks with large property lending exposure. This was seen as a simple response to economic uncertainty; fears emerged of falling house prices and slowing activity in the property market.

This week the big story has been the weakening position of major real estate funds, primarily investing in commercial property – office buildings, shops, warehouses. The firms which manage the funds, Standard Life for example, are concerned that if investors rush to withdraw their money, there will be insufficient capital to repay them. At first, a number of funds reduced the amount that investors could get back. Now, at least six of them – including Standard Life, Aviva and M&G – have suspended trading altogether. This has not happened since the global financial crisis.

Commercial property is in the firing line. Hazel Nicholson/Flickr, CC BY

While it reflects the basic illiquidity of commercial property compared to the short-term needs of worried investors – it clearly speaks to a much more profound concern about the economy and the exposure to housing and property.

Most of us are not heavily exposed to property funds, but many of us are homeowners or hope to be. The risk of falling house prices in the post-referendum environment may threaten highly leveraged mortgages where home owners have taken on lots of debt. The most immediate risk is of “negative equity”, when the value of the house is lower than the loan amount outstanding.

Normally, such “underwater” loans prevent people moving home, but in the absence of repayment difficulties they are not an immediate problem. You just have to wait it out until prices turn. However, the current situation is complicated and potentially more worrying.

This is because of the government’s £31 billion commitment to various Help-to-Buy schemes, £12 billion of which in effect guarantees the exposed part of mortgage loans should prices fall. A sustained price fall which becomes associated with increased defaults on mortgages could mean the government has to make good those guarantees after repossessions on affected properties.

Taking a pounding

Falling house prices in the short run will also reduce existing owners’ capacity to support potential first time buyers: the bank of mum and dad (or granny and grandad) stepping in to help. This will further reduce access to home ownership because younger households increasingly face unaffordable deposit demands before they can get a mortgage. At the moment, access to the levels of cash needed often depends on rather arbitrary good fortune, timing and location. It often boils down to whether your family have the means to lend or give you what’s needed.

Much has been made of the high level of speculation and overseas investment in London’s vertiginous housing market. There were already signs that the market was weakening cyclically prior to the referendum. Subsequently, however, we saw last week that some foreign banks were refusing to lend to their nationals for property investment in the UK. The depreciation of sterling may be encouraging such purchasers into the market, but only if they can find the means to borrow.

In this way we see that a UK housing market dominated by an open, world city in London, does become linked to currency movements and international capital flows, despite the fundamentally local nature of housing and real estate.

No more happy hunting ground? Davide D'Amico/Flickr, CC BY-SA

Home to roost

Falls in share prices, the forced intervention in real estate funds and worries about lending and government exposure to the downside of help-to-buy guarantees explain why the Bank of England says that the Brexit risks are crystalising and is moving to do something about it. However, it is hard not to draw the conclusion that the red flags going up across the housing and banking sectors reflect the underlying or chronic problems we know beset the housing market in Britain:

• Market imperfections in the form of the long term inability to build in sufficient numbers to address growing housing demand.

• Dwindling public investment in social and affordable housing in a period of high and rising housing need.

• Tax raids on the private rental market by targeting buy-to-let investors just when they are playing a critical role by filling the gap between the market and the non-market sectors.

• Tighter mortgage lending in the wake of the mortgage review that sought to reduce future lending risks after the global financial crisis.

• Privileged tax advantages to home owners which lock them in and create a society of insiders and outsiders. This worsens intergenerational inequalities and crowds out other forms of more productive business investment

Broken system. Ben Salter/Flickr, CC BY

Combining these points helps explain the underlying volatility in the housing market. It allows prices and market volumes to fluctuate more than the economy as a whole, while long-term real house price inflation encourages speculation in property assets and serves to frustrate people’s housing and labour mobility choices.

Governments and opposition parties must take concerted long-term action to normalise housing as an asset and a commodity. The policy world must recognise the need to approach housing more constructively, treating it as an entire system win which housing consumption rather than tenure matters most.

Frankly, we must seek to bring an end to a culture where politics is premised on defending existing asset owners’ housing capital rather than providing sufficient housing in the right places at prices and rents ordinary people can manage at different life-cycle stages. If not, we will be condemned to repeat these crises periodically, alongside slowly worsening chronic problems of exclusion, non-affordability and poisonous widening inequality.