There are perhaps only two things that rival Brexit as the U.K.'s favorite topic of conversation. One is the weather, the other is house prices. Luckily for Brits, Brexit's impact on house prices allows them to talk about both things at the same time.
Since the U.K. voted to leave the European Union in 2016, the country's housing market has stuttered as buyers and sellers await certainty on the direction of the economy. Annual house price growth slowed to 0.9% in June 2019 from a rate of 8.2% three years previously, according to data from the Land Registry.
Brexit uncertainty exacerbated the dampening effect of increases to property purchase taxes, known as stamp duty, that were introduced between 2014 and 2016, according to a September report by professional services firm KPMG. Just two months prior to the 2016 referendum, the U.K. government introduced a 3% stamp duty land tax on all purchases of second homes and buy-to-let properties.
"The residential market has experienced something of a hiatus [since the 2016 referendum]," Ian Fletcher, director of policy, real estate at the British Property Federation said in an interview. "Investors clearly have been cautious in terms of what they've been taking on. People would have invested more if there had been more political and economic certainty."
House price growth in London, by far the U.K.'s most expensive housing market, has been the most severely impacted since 2016, data from KPMG shows. The price of homes in the U.K. capital fell by an average of 0.4% in 2018. This compared to a rise of 5.1% in Northern Ireland and a U.K. average increase of 2.7%.
If the U.K. government manages to secure support from Parliament for its latest deal before the end of October, KPMG expects the housing market to pick up across the country in the last months of 2019. The bounce would carry on into 2020, KPMG data shows, with U.K. average house price growth rising from -0.1% in 2019 to 1.3% next year.
But average London house prices would continue to fall, from -4.7% in 2019 to -0.2% in 2020. Other regions would experience house price growth of between 0.6% and 2.4% in 2020, KPMG said.
A conclusion to the first stage of Brexit negotiations, and not leaving the EU without a deal, would certainly be welcomed by the U.K. residential market, said Dominic Grace, head of London residential development at real estate services firm Savills. "It would prompt a sort of sigh of relief, an almost audible sigh of relief from the market," he said. "And some sort of bounce, but the question that is difficult to answer is how much of a sustained bounce that would be."
Any uplift in the London market would be offset by ongoing issues of affordability, Grace added, citing the requirement of an average deposit of £150,000 to buy a home in the city as evidence of the market's high barrier to entry.
House of cards
Forecasts for the U.K. housing market if the country leaves the EU without a deal are much less benign. Average house prices across the country would fall 1.1% in 2019 if the U.K. left without a deal on Oct. 31, and then plunge by 6.2% in 2020, KPMG said. London and Northern Ireland, the two markets KPMG view as most exposed to the impact of a no-deal Brexit, would suffer the greatest price drops of any regions, at 7.0% and 7.5% respectively. House prices in other regions would fall by between 5.4% and 6.7%.
Last November, Bank of England governor Mark Carney warned that in the event of a no-deal Brexit without a transition period, a worst-case scenario for the ensuing five-year period would see unemployment rise to 7.5% and house prices fall by 30%.
"The housing market would suffer [in the event of a no-deal], not only in terms of development and investment, but for those owner-occupiers who are already in homes," said Fletcher. "As well as a direct impact on the market, there's the indirect impact if we anticipate that a no-deal would lead to economic consequences in terms of a probable recession. Clearly, that is going to have a significant impact on the housing market and people's willingness to move, to take on new commitments."
One bright spot for the U.K. residential market in recent years — and perhaps whatever Brexit outcome materializes — is the rental sector. High house prices fueled by the U.K.'s chronic housing shortage has supported growing demand for rental homes. This demand has received a further boost from the political and economic uncertainty generated by Brexit, which has led renters to defer house purchases until there is greater clarity in the market.
The favorable market dynamics have attracted billions of pounds from institutional investors into the U.K.’s burgeoning build-to-rent sector in recent years. The latest figures from the BPF and Savills show that the sector grew by 20% year-on-year in the third quarter of 2019 to 148,000 homes.
"The rental market is proving to be strong," said Grace, adding that the sector hasn't been completely insulated from the economic impact of Brexit uncertainty. "But on the whole, a lot of that money that's come to the build-to-rent market has come in since mid-2016. So that tells you most of that money is just taking a view that there's a very good long-term story around the rental market, regardless of Brexit."