How could Brexit impact UK house prices?

Many UK and global news outlets have recently carried reports of statements made by Bank of England (BoE) governor Mark Carney relating to UK house prices and Brexit consequences.

Carney’s statements were apparently offered to the government on 13th September. There has been no official comment on Carney’s position by the BoE and the exact text of his comments has not been released.

However, through a combination of what appear to be government leaks, unofficial briefings and press speculation, it has been widely reported that he outlined various scenarios whereby house prices might fall significantly depending upon the nature of the Brexit deal.

Reactions

The media have largely concentrated on Carney’s alleged warnings that house prices in the UK might decline by 35% in the context of a worst-case outcome of a disorderly Brexit. The same is generally true for most political comment.

Most of the press interpret “disorderly” to mean without some form of close-alignment deal between the UK and EU – though interpretation on that point varies by source.

Yet while most commentators have majored on Carney’s presumed views on that single point, the way it has been interpreted and discussed by the media and politicians alike, is far from uniform.

The analysis of his statements, which is must be remembered were never officially reported, has broadly and unsurprisingly split by:

  •  media that are essentially supporters of Brexit;
  • those media that were and are Remain supporters, some of whom are now campaigning for (or are sympathetic to the idea of) a second referendum;
  • politicians who are known for pro-Brexit views. Some of this group were outraged at Carney’s comments, likening them to support for “project fear” and implying a political motive in what should have been an apolitical context;
  • the politicians who are either Remain supporters or who wish a Brexit under terms that continue to closely align the UK to the EU.

Each of the above groups placed their own interpretations, supportive or overtly hostile, on Carney’s perceived position.

The three scenarios

Carney’s government briefing on Brexit scenarios and their possible impact on the economy presumably was based upon the three most likely generic outcomes of Brexit:

  • a UK exit on terms that closely align to existing EU practices and which ensure the UK’s ongoing unrestricted access to the single market. This is sometimes referred to as a “soft Brexit”. There is some speculation that this is the BoE’s preferred route in terms of minimising negative economic impacts;
  • Brexit on the basis of a major compromise between both parties which would essentially maintain easy and preferential trade between the two. This scenario is currently being widely considered to be the Prime Minister’s latest “Chequers’ Plan”;
  • a Brexit which essentially involves no special deal or relationship between the UK and EU. The relationship for trade and economics would default to standard Word Trade Organisation (WTO) terms and the EU, from a UK trade perspective, would be no different to any other country. This is sometimes referred to as a “hard Brexit”. There is some press speculation that this is the “disorderly” exit as seen by Carney;

It is not clear how Carney related each of these to their probable economic outcomes.

Economic consequences

There is little consensus in the media or political world about the relationship between the above scenarios and the economic health of the UK as a consequence. The two broad “Remainer” and “Brexiteer” alignments have maintained their own, very distinct, views.

Most sources typically regarded as Remainers consider that a hard Brexit would be an economic catastrophe. They also might be typically inclined to see the Chequers’ Plan as a highly risky compromise that risks damaging the economy but which is preferable to a hard Brexit.

By contrast, Brexiteers see things largely entirely in reverse. They argue that the true potential economic benefits of Brexit cannot be achieved unless the UK’s break is firm, final and fundamental.

Some in the Brexiteer group see the Chequers’ Plan as watering-down the opportunities arising from Brexit but that it might be a price worth paying, in the short term, if it means Brexit goes ahead and any further discussion of an unlikely second referendum is finally squashed.

Specific housing market considerations

One of the few areas most press sources largely agree on is that Carney’s now famous or infamous (depending upon one’s viewpoint) “35% reduction” comments were probably his presentation of a worst-case scenario, not a forecast. That based upon the presumption that a harder Brexit had led to widespread negative economic consequences for the UK.

That scenario planning should not be surprising for two reasons:

  • the BoE has a mandated responsibility to present forecasts of scenarios that are positive, neutral and negative and to show its contingency planning for those that are negative – however unlikely they might be. It might be assumed that Carney also discussed positive Brexit outcomes but that these did not catch the attention of the media and politicians, being less newsworthy;
  • anything that might cause major economic disruption (terrorism, major disasters, conflict, social upheaval or political uncertainty etc.) will typically have a negative impact on the economy. While there is no obvious firm direct link between Brexit and UK house prices, if the background economy is weakened by it, then it may have a knock-on effect on the property market.

There has been little direct evidential discussion in the media as to exactly how, other than through indirect effects via the background economy in areas such as interest rates and the international cost of finance, any Brexit scenario should lead to a consequential fall in house prices.

Some analysts are also pointing out that the similar house price collapse forecasts of the Remainers, issued in the run up to and immediately after the referendum, never happened.

Construction issues

Some sources have argued that Brexit is bad news for the construction industry and house prices because:

  • labour from the EU may be harder to obtain (though it’s not clear how this would reduce house prices);
  • jobs, primarily in London and the South East, might be lost due to major corporate relocations, the reducing numbers of EU workers arriving and a general loss of confidence. This argument is sometimes supported by statistics showing declining recent sales in these areas.

However, it is far from clear that the sluggish housing market in London during 2018 is a direct result of the pending Brexit. As the same sources as given above acknowledge, a far more significant cause may be recent taxation changes that have impacted the buy-to-let sector.

House prices – summary

Most sources agree that Brexit could have one of three potential outcomes for the UK economy:

  • negative;
  • essentially business-as-usual with no significant change;
  • positive.

In terms of house prices, that means essentially familiar territory.

If the economy is positive and vibrant, house prices will typically rise. Economic woes mean they might fall. A neutral economic impact will mean other factors, such as inflation, living standards, government taxation policies, employment and income levels, will all continue to be the major factors that affect UK prices.

For professionals in the construction and housing industries, this may continue to be a question of watching the economic indicators once a Brexit deal is finalised or conversely, stated to be unachievable.

Carney’s statements do not, in themselves, change the basic underlying reality that what is going to happen in the economy is unclear.

 

Sources:

https://www.thetimes.co.uk/article/house-prices-would-plummet-in-no-deal-brexit-says-carney-csgr9j0hj
https://www.thesun.co.uk/news/7255807/house-prices-no-deal-brexit-eu-mark-carney/
https://www.dailymail.co.uk/news/article-5124083/Disorderly-Brexit-hurt-banks-cope-Carney.html
https://www.theguardian.com/politics/2018/sep/13/no-deal-brexit-could-be-as-bad-as-2008-financial-crash-carney-says
https://www.bbc.com/news/business-45516678
https://www.propertyinvestortoday.co.uk/breaking-news/2018/9/leave-voting-areas-exhibit-the-most-confidence-in-property-market
https://www.theguardian.com/business/2017/dec/05/housebuilders-issue-brexit-plea-as-poll-reveals-uk-reliance-on-eu-workers
https://www.ft.com/content/87b1f284-1452-11e7-80f4-13e067d5072c