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What impact might a hard Brexit have on the housing market?

  1. 26 November 2018
  2. By Andi Michael

With uncertainty around Brexit influencing multiple markets, we look at how property would be affected by a hard Brexit.


With Theresa May’s draft Brexit plan being attacked from all sides of the political divide – including many members of her own party – the prospect of a no deal or hard Brexit is still a distinct possibility.
 
The day after the Cabinet had appeared to agree to the draft Brexit plan, a flurry of resignations – including Brexit Secretary and former Housing Minister Dominic Raab and Work and Pensions Secretary Esther McVey – put May’s plan on the rocks.
 
Rumours have been swirling ever since about a vote of no confidence in her leadership – 48 letters from Tory MPs are needed to trigger the vote – while the DUP, who the government rely on for a parliamentary majority, recently withheld its support in votes on Budget measures as a backlash against the draft Brexit deal.
 
With Labour and other opposition parties, as well as a number of Conservative MPs, set to vote down the government’s Brexit plan in the House of Commons, the withdrawal agreement drawn up by London and Brussels faces a very uncertain future.

What would a no deal Brexit mean?

Previously, the government – and Theresa May in particular – had said it was preparing for a no deal Brexit, which would see Britain leave the EU, the single market and the customs union and operate under WTO trade regulations.
 
While there is no knowing for sure what would happen, some have predicted a no deal Brexit would cause chaos at ports and airports. There has been talk of stockpiling food and medicines and an emergency Budget being called if a no deal scenario were to become reality. Business – which thrives on certainty and clarity about the future – would be left with even more uncertainty.
 
Brexiteers, on the other hand – who are more likely to favour a hard Brexit and a total break with Europe – say May’s deal as it is proposed leaves the UK far too closely aligned to the EU. Pro-Brexit Tory MPs, who are currently manoeuvring to depose the Prime Minister, would prefer a Leave-voting leader who would renegotiate the current deal to push for a harder Brexit. David Davis, another former Brexit Secretary, ex-Foreign Secretary Boris Johnson and Environment Secretary Michael Gove have all been put forward as possible replacements.

What would a hard Brexit look like?

Since the referendum result was announced in June 2016, there has been much talk about a soft Brexit – where Britain stays closely aligned to the EU by effectively remaining in the single market and some form of customs union – and a hard Brexit, which is favoured by those who voted strongly to leave.
 
Those advocating a hard Brexit say by leaving the single market and customs union, the UK would be free from its regulations and tariffs and able to make its own new trade deals and trade agreements with the rest of the world. While this might cause disruption and economic damage (to both the UK and EU) in the short-term, supporters say this would be worth it to allow the UK to operate independently, as well as having more control over its borders, laws, immigration policies and seas.  
 
Free movement of people – one of the defining characteristics of the European Union – would be ended, which would change the rules allowing EU citizens to move to and settle in Britain, and vice versa for British citizens within the EU.

What impact would a hard Brexit have on housing?

 An end to free movement of people could have a significant impact on the rental market, with EU immigrants far more likely to rent than buy. This could lower demand, particularly in London, where the availability of jobs in a wide number of industries draws a substantial number of EU nationals.
 
Equally, the construction industry could be hit by a shortage of labour. EU nationals account for approximately 7% of the UK construction workforce and a hard Brexit could leave their status unclear. With the government’s promised housebuilding drive, any loss to skilled labour could prove to be an issue.
 
At the same time, there is no guarantee that EU nationals would immediately lose the right to work in the UK under a hard Brexit scenario, while some suggest that more British nationals could be trained up to plug the gap in labour if free movement was ended or restricted.
 
Supporters of a clean break from the EU also suggest the construction industry will be less impacted by extensive red tape, which could increase the speed at which housebuilders can build homes.
 
There have been suggestions that a hard Brexit could lead to house prices dropping, especially in London. Back in August this year, a poll of 30 analysts and experts by Reuters suggested that London’s property market could be facing further bother over the next two years in the event of a hard Brexit, with predictions that average prices will fall by 1.6% next year and 0.6% a year thereafter.
 
Brexit supporters, though, would point to the robust performance of the property market since 2016. While there was an initial hit to the housing market and buyer confidence in the aftermath of the vote, this soon recovered, and the market has remained on a relatively steady footing since.
 
Our own data confirms this, where we saw house prices growing in the run up to the referendum, dropping due to likely uncertainty after the result, and gradually stabilising. However, growth in transaction prices has slowed in the run up to 2019 and HMRC October figures show that residential transactions were down 2.7% year on year.
 
Although it’s true that Brexit uncertainty has weighed down house prices – most noticeably in London – there has been no apocalyptic scenario of house prices crashing dramatically.
 
There are also the fundamentals of the property market to consider, which won’t change hugely even if a hard Brexit comes to pass. Demand is still drastically outstripping supply across the country, which is helping to keep house prices high and price growth fairly consistent.
 
Consumer sentiment is also strong despite Brexit uncertainty, with a recent Zoopla report finding that more than half (55%) expect house prices to increase in the area where they live by the end of 2019. By contrast, though, only a third of estate and letting agents (surveyed separately) anticipated house prices would increase over the same period.
 
There are, however, signs that Brexit uncertainty is starting to grip the market, which could be a forbearer for what is to come if a withdrawal agreement is not reached. Rightmove’s latest research found that UK house prices dropped by more than £5,000 on average in November, the largest November fall in prices since 2012, with Brexit uncertainty and pre-Christmas affordability issues the two main factors at play.

A guessing game

 Overall, it’s very difficult to tell how the UK housing market will fare if a hard or no deal Brexit occurs – as there are simply too many variables at play. As we saw in the referendum itself, attempts to make accurate projections about the future often prove futile.
 
What is clear, though, is the ongoing uncertainty is good for no-one. Clarity is needed so everyone can move forward, and the property industry is no exception.
 
 
 

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