How Brexit Could Affect the UK Housing Market

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The UK’s impending departure from the European Union has left more questions than answers. Whether it concerns travel restrictions, trade tariffs or food prices – it’s now more than two years since the infamous referendum and we are still virtually in the dark. However, if you thought the Brexit saga wasn’t complex enough – some commentators argue that it could also have a detrimental effect on the UK property market.

In this article we take a comprehensive look at some of the factors that could lead to a downfall in prices and what this means for you as a home owner. This will cover the links to Brexit, as well as other potential reasons that might also play a key role in determining the direction of the markets. Furthermore, we’ll also attempt to understand what Brexit might mean for first time buyers and their chances of obtaining a mortgage.

Let’s start by quickly looking at the current state of play in the UK housing market.

The UK Housing Market – What’s the Current State of Play?

The UK housing market is in a state of stagnation. According to recent data released by Mortgage provider Halifax, average house prices rose just 0.3% in May, which followed on a from a 3% loss the month prior. The lender added that by the end of the year, UK home owners might see no growth at all for 2018, something that is in stark contrast to the previous five years. Home owners have been somewhat fortunate regarding the growing value of their property since the turn 2013, as prices have increased significantly year-on-year. However, it now appears that things are starting to dry up.

In terms of transactional activity, sales of UK properties dropped by close to 5% in the second quarter of 2018 in comparison to the previous year. This viewpoint is further supported by figures released by estate agency Countrywide – who state that the amount of properties being purchased by landlords is also on the decline. According to the report, just 12.5% of all home sales were bought by landlords in 2017 – amounting to its lowest figure in 9 years. The aforementioned woes are not just indicative of Greater London, as it appears that the market is stagnating nationwide.

Sales of UK properties dropped by close to 5% in the second quarter of 2018 in comparison to the previous year.

Although there are a plethora of potential reasons why this might be, some commentators argue that it is directly linked to the uncertainty of the ongoing Brexit negotiations. Let’s find out why.

Is the uncertainty of Brexit affecting the UK housing markets?

The discussion of Brexit’s effect on the UK housing market begun in 2016, with Mark Carney – Governor of the Bank of England (BoE), stating that those looking to get on the property ladder should proceed with caution. The comments were in direct correlation to the potentiality of Brexit causing vast uncertainties in the wider economy, with Carney adding that first time buyers should act with prudency.

This sentiment is especially true for London properties, whereby demand is often determined by the health of the international markets in their entirety – something that some predict could soon move southwards. Moreover, in a recent Reuter’s poll by a group of housing market analysts, it is estimated that house prices in the capital are likely to fall by 1.6% by the close of 2018 and 0.1% in 2019. The general consensus once again was that international buyers are still demotivated to commit whilst Brexit negations remain uncertain.

It is estimated that house prices in the capital are likely to fall by 1.6% by the close of 2018 and 0.1% in 2019.

Online property platform Rightmove explain that the London property market is heavily reliant on foreign investors, which is one of the main reasons why the capital consistently outgrows the rest of the nation. In fact, the same firm claim that the average London property is now worth more than £609,000 – which is more double the national average.

One of the key concerns for buyers is that were interest rates to return to pre-2008 levels, or even worse higher – house prices could be in for a significant downfall. BoE base interest rates have remained below 1% since they were reduced in 2009. Although these levels are in stark contrast to pre-recession figures, interest rates have in fact been raised twice since the Brexit vote. In November 2017 and August 2019 rates were increased to 0.5% and 0.75% respectively. Many argue that if the UK leaves the EU with no deal, then a more significant rate hike could be on the cards.

What does rising interest rates mean for home owners?

To continue on from the above discussion on a no-deal Brexit leading to an increase in interest rates, this could have a detrimental effect for those currently repaying a mortgage. The reason for this is that most variable mortgage deals are linked to the official BOE base rate. Although the rates on offer do not always mirror the BOE rates like-for-like, they most certainly move up or down in the same direction.

For example, if you obtained a mortgage after March 2009, the interest charged on your monthly repayments are likely to be ultra-competitive, not least because rates have remained below 1%. However, should these rates experience a sudden hike upwards – your monthly repayments will ultimately follow suit. This can often result in a situation whereby home owners are not financially prepared for an increase in monthly repayments and consequently – can lead to issues regarding affordability.

Bank of England

Read: The Bank of England is Raising Rates: Time to Lock in a Fixed Rate Mortgage?

A hike in interest rates could also be costly for landlords who are in receipt of a mortgage on a buy-to-let basis. The reason for this is that most buy-to-let arrangements are based on an interest-only agreement, rather than a repayment mortgage. What this means is that landlords take full advantage of low BOE rates by only paying the interest off, rather than the value of the actual mortgage itself. This is great during periods of ultra-low interest rates as landlords make a significant profit from the capital they receive from tenants. However, when interest rates take a sudden turn northwards, monthly repayments can increase significantly.

This squeeze on interest rates, along with an increase on stamp duty for those purchasing a second home, are forcing landlords to consider selling. Ultimately, as demand for a second homes begins to dwindle, as does the ability for the wider market to grow in value.

At the other end of the spectrum, let’s see how the Brexit saga is affecting first time buyers.

Brexit and first time property buyers

The situation being faced by first time buyers is potentially more complex than those already in possession of a home.  You might be in a position where you have finally saved the required deposit, but are unsure as to whether or not now is the right time to buy. This is ultimately a difficult conundrum, especially considering the fact that we are still in the prolonged period of uncertainty. There is no doubt that getting on the property ladder whilst interest rates are low is an excellent time to buy, as your initial monthly repayments will follow suit. Moreover, with enhanced competition now being faced by mortgage providers, there are some incredibly attractive deals to be had.

Mortgage Guide for First Time Buyers

Read: Mortgage Guide for First Time Buyers in the UK

However, with the ongoing murmurs of a potential reversal of housing prices, many first time buyers are concerned about the prospect of taking out a mortgage at the wrong time. This is because whilst the value of the property could go down, the amount owed on the mortgage remains the same. This has the potential of putting first buyers in a position of negative equity – which is the much feared process of owning more on a mortgage than the actual value of the asset.

Nevertheless, recent statistics potentially suggest otherwise. The post-Brexit era of 2017 saw the highest amount of first time buyers enter the market since 2006. This could indicate that the reduction of stamp duty fees (for first time buyers purchasing a property under £300,000), ultra-low interest rates and government schemes such as the Help to Buy program are significantly more influential on the market than the uncertainty of Brexit.  Moreover, with the secondary buy-to-let sector now on the decline, it might force sellers to accept lower offers – further benefiting those who are looking to get on the ladder for the very first time.

The post-Brexit era of 2017 saw the highest amount of first time buyers enter the market since 2006.

It is also worth remembering that if the wider UK housing market does experience a significant pricing correction, then those who are fortune enough to enter the ladder towards to trough of the trend will no doubt benefit considerably. Furthermore, it will also mean that first time buyers will be able to obtain a mortgage with a much lower entry-deposit.

Ultimately, whilst securing a mortgage at the right time can work in your favour – it is always worth reminding yourself that no matter what the current economic climate, the benefits of owning a home will most certainly outweigh those of renting.

How Brexit Could Affect the UK Housing Market – The Verdict?

One of the most frustrating aspects to the ongoing Brexit negotiations is uncertainty. No matter what industry is being discussed, people can be much better prepared when they know what the future holds. This is in stark contrast to the current state of play, as we are still in the dark as to how the UK’s exit will pan out.

Nevertheless, with some industry expects predicting that house prices across the board look set for a correction, then we could be set for a period of decline. If this is the case, then it is also predicted that the fall-out will be felt substantially harder in the ever-inflated London market.

A further factor that could potentially have an impact of the housing market is interest rates. If the general consensus is correct, insofar that Bank of England interest rates cannot remain below 1% for much longer – then those currently in receipt of an interest-only mortgage could be set for a sudden hike in monthly repayments.

This particular type of mortgage package is very popular in the buy-to-let sector, meaning that renting might no longer be cost effective for landlords. As a result, a reduction in the secondary housing market might further amplify the projected reduction in prices.

One such demographic that could benefit from the above are first time buyers. A reversal in the wider markets – if timed correctly, might provide greater opportunities to enter the market. This is especially true for those that are struggling to meet minimum deposit requirements.

In conclusion, whichever way Brexit does go – we could all do with a bit of certainty sooner rather than later.

Kane Pepi

Kane holds a Bachelor's Degree in Accounting and Finance, a Master's Degree in Financial Investigation and he is currently engaged in a Doctorate - researching financial crime in the virtual economy. With a keen passion for research, he currently writes for a variety of publications within the Financial and Cryptocurrency industries.

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