Will Property Prices Fall in UK After Brexit?

Will property prices fall in the UK after Brexit? It’s the question that’s on the lips of buy-to-let investors and first time buyers up and down the country.

Brexit uncertainty, tax changes and new laws to protect tenants are shaking up the housing market in a way not seen since the 2008 recession.

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As investors, low property prices can be both a blessing and a curse – low prices mean we can buy more cash flow generating freedom assets, but also mean more competition with other investors; and ultimately, if prices fall too low, negative equity and dried-up credit lines.

So where is the UK property market heading, and will the post Brexit world (if we ever get there!) continue to be a land of opportunity for property buyers?

Bank of England

Where is the UK Property Market Now?

The expert advice is all over the place on this one. The Halifax have house prices surging 5.2% in the year to May, a fantastic rate of return for property investors, if true.

But the industry considers Halifax to be an outlier. The more consensus view is that house prices rose between 0.6% according to Nationwide and 1.4% according to Official Government figures. Either way you look at it, prices have risen over the last year.

The recent relative stability of the housing market is due in our opinion to wider economic factors outside of the Brexit debate.

Employment remains high and interest rates remain low, keeping mortgages affordable and house prices steady.

However, an economic upheaval such as a recession due to a mishandling of Brexit, or by a Corbyn government keen on shaking up the economy, could change all of this.

RPI Measure of Inflation

The RPI measure of inflation differs from the more commonly used CPI in that it includes house prices.

It is somewhat correlated to house prices as a result, and useful for tracking prices in the whole economy.

Above, we see how RPI has moved over the last 5 years. What is interesting is the period from 2016 to 2019 – despite the uncertainty caused by the Brexit shambles in Parliament, prices across the economy have continued to rise at a traditional rate of inflation, around 2-3% – led by a strong jobs market and affordable interest rates.

Brexit - Will Something Finally Happen Soon?

Brexit

Coming onto Brexit – what this now represents for economists is uncertainty.

Prolonged uncertainty is the death of an economy, and in our opinion the protracted feet dragging in Parliament is causing a much more severe economic impact than either Leaving or Remaining in the EU would bring.

No matter your position on Brexit, you should at least agree that something needs to be done quickly.

There are 2 realistic options for Brexit now in our view – a No Deal Brexit, or Leaving with a Deal.

Remaining is of course possible too, but doesn’t look likely in the short term, and certainly is not expected by the markets – and property prices are driven by market expectation.

Why Does Nobody Have Faith In The UK?

No Deal

Rightly or wrongly, the market is terrified of No Deal, and the latest line from the Bank of England is that they would lower interest rates in the event of No Deal to stimulate the market – possibly even down to 0%!

Under normal circumstances, we might expect lower interest rates to lead to higher house prices, as people can more easily afford mortgages and have more disposable income, creating more demand – more people competing for the same limited housing stock.

However, these are not normal circumstances, and if a No Deal Brexit is delivered incompetently, there could be an economic shock akin to the last recession.

We expect this would drive house prices down as buyers pull out of the market, over and above the effect of an interest rates fall.

Our expectation in a No Deal Brexit scenario would be that property prices hold steady at the least, or fall in the short term.

"Accidental" Landlords Will Drop Out

Leaving with a Deal

The Bank of England have said that if we Leave with a Deal, they would put interest rates up.

Raising interest rates would likely slow the economy as spending becomes more expensive, decreasing demand.

At the same time, accidental landlords would drop out of the market as their mortgages become too expensive to make a profit, increasing supply. When demand is decreased and supply increased, prices fall.

Other than the impact of interest rates, we expect that Leaving with a Deal would be business as usual.

Some investment cash may be released into the economy that had been held back, raising prices, but we think the impact of interest rates would be more significant.

The reason we think that interest rates will have a greater impact than Brexit itself is because we expect the Bank of England to over-correct the interest rates adjustment in response to Brexit, as they are so terrified by it.

We believe that the UK will carry on regardless of membership of the EU, or lack of it.

3. Mini Crash
The Property Cycle - Mini Crash

The 18 Year Property Cycle

Another tool in our arsenal is Property Cycle Theory. We’ve looked before at how the property market broadly moves in 18 year cycles.

As a refresher, the 4 phases are: Recession; Recovery; Mini-Crash; and Boom.

We are currently in an extended Recovery phase, teetering on the start of the Mini-Crash.

We think that the Brexit uncertainty of the last 3 years has held the market in paralysis, and is delaying the inevitable.

Once Brexit is resolved, we expect the market to return to form and see falling prices for a couple of years during a Mini-Crash, followed by rising prices during a Boom Phase – akin to what happened during the 90s.

4. Boom Phase
The Property Cycle - Boom Phase

Conclusion

We expect property prices to hold steady in the short term, then fall naturally for a year or 2 in line with the Property Cycle once the pressure valve of a political decision over Brexit is taken, possibly in October 2019.

Finger in the air, we would then expect property prices to return to strong growth during a Boom phase for several years more – but looking more than a year ahead really is guesswork.

Low prices mean investors can buy more houses – price rises mean we’re making a better return on our existing portfolio, and can take advantage of equity release to improve cash flow.

High or low, a good investor will take advantage of property prices as they stand.

Do you think UK property prices will fall? Let us know in the comments below.

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