Britain’s housing market is in a sorry state. With house prices forecast to fall, house building grinding to a halt and buyers pulling out of purchases amid job security fears, post-Brexit uncertainty has been worsened by the contrasting “visions” that won the vote.
These opposing visions are now evenly represented in Theresa May’s cabinet. The more liberal Leave campaign wanted greater economic freedom, with less government and “Brussels bureaucracy”. Its supporters have quickly retreated from any pledge to bring down immigration, which would compromise access to the EU single market.
The others in the Leave side, however, are happier to resist market forces, even accepting some short term sacrifice of living standards to restore “sovereignty”, and a sense of community they view as eroded by too much free movement. For these “grassroots” Leavers, concerned about social cohesion and quality of life, lower house prices are a key Brexit bonus. Controls on arrivals from the EU and strict barriers against refugees are intended, in part, to reduce the demand for homes and related public services.
This could, in turn, make housing more affordable to existing residents, with wages rising as fewer compete for available jobs. And if the economy slows, interest rates will fall further, potentially improving mortgage affordability.
Houses could well become easier to buy if, as both factions promised, average incomes now rise due to “unshackled enterprise” and less competition for jobs. Those pursuing homes to live in may also find there are fewer rival buyers treating property as just another investment. Rule changes in April had already quelled buy-to-let demand. Absentee foreign buyers who had inflated prices in and near London might now look to buy in other capitals that will remain within the EU.
However, UK borrowing costs may still have to rise if the weaker pound rekindles inflation. Even with a near-zero base rate, households might soon find borrowing harder if, as the Remain camp warned, EU labour protections are now withdrawn and incomes grow more slowly in the long run. Official growth forecasts have until now assumed continued net immigration of well over 250,000 per year, but as May was the architect of Conservative pledges to stem this inflow, that too may change.
No relief for Generation Rent
Making housing more expensive has been central to economic recovery strategy since 2010. This is because rising prices benefit homeowners, who are still a large majority of voters. Many younger voters priced out of the market will now hope that affordable housing can be part of May’s version of Conservatism. But while her swift installation might dispel the uncertainty that stalled pre-referendum investment – including housing starts – her new economic plans will have to rule out a sustained drop in prices, as this would hit household spending too hard at a time when other sources of demand are also weakening.
Households are already approaching a level of borrowing which proved unsustainable before 2008. So longer-term house price growth is unlikely to exceed national income growth, which most forecasters calculate will slow down as the UK starts its slow path out of the EU.
And even if Brexit does not restrain production and income growth, it is likely to weaken house buying demand by hitting the profitability of banks, whose recovery from crisis is still being slowed by tougher regulation, new entry and alternative forms of business borrowing.
So while many landlords suspect that Brexit will end the long escalation of housing costs both for buyers and renters, this is unlikely to make it any easier for the average household to find an affordable home.
This is because although rising investment might speed up residential building and renovation, it would leave house builders vying for resources with commercial construction and other industries – even if the general labour supply is not constrained by lower immigration.
In short supply
The long run up in house prices reflects a chronic failure to build enough new homes, often traced to restrictive planning laws that reflect local concerns much more than eurocratic meddling.
To ensure profit, developers always have an incentive to release new homes more slowly than the market needs them. And neither local authorities nor housing associations are currently able to fill the gap. So while the estimated 11m adults and 3m children in inadequate accommodation in England indicates a real need for more houses to be built, the market is far from ready to deliver them.
The immediate adverse impact on housebuilders’ and housing associations’ finances is likely to offset any state sponsored home building drive, despite the new chancellor’s quick retreat from Treasury budget-balancing pledges. And if anything, the risk of post-Brexit slowdown now strengthens the government’s incentive to boost housing demand without comparably raising supply.
Even if eventually controlled, immigration could actually temporarily rise to beat anticipated restrictions – putting increased demands on housing supply.
Although, this influx of people might actually help to boost labour supply and allow construction to quicken – but only if building firms can hire them. Housebuilders’ sagging share prices in the wake of the referendum suggest they might not.
And although lower immigration from the EU would eventually ease demand for housing, it would also reduce access to those legendary Polish builders, who will be hard to replace with local labour.
Always hazardous, economic forecasting is especially uncertain in relation to housing because buyers’ and suppliers’ finances are in line for both positive and negative shocks, on an uncertain timescale. But as a sharp fall in prices will only occur if the economy turns downwards, it would not bring the boost to affordability that Generation Rent awaits.