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Is Brexit the start of a lost decade for house prices?


06-28-2016

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The full impact of Brexit will take many years to emerge, but the house price growth which many people in the UK have become accustomed to now seems to be at an end. That's because uncertainty is likely to be exceptionally high for a number of years and this looks set to cause foreign and domestic buyers to hold off on buying UK property.

In the short term, the UK needs to put in place a new Prime Minister. This process is likely to take at least three months, as the Conservative party elects a new leader at their party conference -- who may (or may not) then go on to call a General Election. Alongside this is uncertainty regarding the future of Scotland and to a lesser extent, Northern Ireland. Although the breakup of the UK may be unlikely, the mere possibility of it is likely to cause potential house-buyers to be put off.

A lengthy divorce

Once a new Prime Minister is in place, he or she must negotiate with the EU on the terms of the UK's "divorce". This will be a lengthy process and could see both sides play hardball with one another, thereby further increasing the uncertainty. Then, once the UK has left the EU, there will be another period of uncertainty as the UK goes it alone for the first time in over 40 years.

With the UK having been seen as stable from an economic and political standpoint, Brexit will create a fundamental shift in how foreign investors view the country. This is likely to mean reduced demand for London property, in particular, even though a weaker pound makes it more appealing from a currency perspective. As a result, overall demand for UK property may fall considerably in the coming years.

Furthermore, there is a good chance of rising interest rates. That's because a weaker currency makes any economy more competitive due to its positive effect on exports. This could give the UK economy a boost and mean that rock-bottom interest rates are no longer necessary. And with the cost of imports rising due to a weaker currency, inflation may increase and mean that an interest rate hike is required to an even greater extent. Higher interest rates will mean that houses are even less affordable than is currently the case due to higher borrowing costs.

The only way is down

Of course, house prices have been unaffordable for many people for a number of years. The house-price-to-average-earnings ratio stands at its highest level since the start of the credit crunch, which indicates that a fall is on the cards, even without the effects of Brexit. And if prices do start to fall then many people are likely to wait for even lower prices, with it becoming a snowball effect which could take place at a faster pace than many investors are currently anticipating.

So, while house prices have performed well in the last 25 years or so, they now look set to endure a lost decade. Combined with the negative effects of higher stamp duty on second homes and the lack of higher rate mortgage relief, there seems to be little reason for them to go anywhere but down.

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