When it comes to investing, there are numerous questions that need to be asked, and lots of things which need to be properly understood before committing your hard-earned money
Are we really on the brink of a house price crash?
It’s barely been a fortnight since the historic referendum vote, but with all the economic fallout which has ensued, it feels as though it took place during a previous lifetime. Attempting to assess the full ramifications of Brexit at this stage is almost impossible in such unprecedented circumstances – not least of all because the process hasn’t technically begun yet.
But investment and the economy is, by nature, a game of speculation, and one of the areas of the market which appears to be particularly riddled with uncertainty is that of property. Those who feel a world away from making it onto the housing ladder will probably be licking their lips at the prospect of a crash. But, for homeowners, it is a serious business.
The early indicators
A report released by the Bank of England (BOE) this week predicted that house prices could slump by up to 20 per cent on average as a direct result of the UK’s departure from the European Union – albeit that that was cast as a worst-case scenario.
In the immediate term, house price indices among Blue Chip builders and the bigger names in the industry have already taken a significant beating in the past week. Forecasts from the companies have been a mixture of bullish, cautious and grim, thus making it difficult to assess which way things will go. However, BOE governor Mark Carney has issued some reasonably dire warnings on this front too.
The threat of recession could have an impact of its own on house prices too. Those whose financial circumstances change and are struggling to pay off their mortgages will, at best, fuel the recession by having to cut back on their spending. At worst, if they are unable to pay off their loans, enormous pressure will be put on banks and building societies, while repossession of homes on a mass scale would compound house price woe.
Added to this, the uncertain circumstances could well set into motion a firesale among buy-to-let landlords looking to beat the decline, which would apply further downward pressure.
Weighing up the mitigating factors
The other school of thought is that Brexit doesn’t actually have very much to do with the potential house price crisis. First of all, the slowdown of the Chinese economy and slump in oil prices has scared many foreign buyers away from purchasing commercial property, particularly in London, and this had arguably begun to take effect before 23 June.
The Chancellor of the Exchequer has also introduced some measures over the past year or so which, by nature, will have slowed demand for residential property. These changes include increases in stamp duty and tax on buy-to-let properties, while taxes on second homes and more stringent mortgage rules for prospective homebuyers are also in the pipeline.
UK house prices are cyclical anyway, with many booms and busts scattered across its chequered history. The argument that the market is overheated – both within the M25 and beyond – is one that’s been regularly made. Indeed, the UK House Price Index rose by around 30 per cent in terms of index points from the start of 2013 to April 2016, with month-on-month increases in all but three in that time. It does appear to be somewhat unsustainable in itself. So, the question becomes, to what extent would a lack of EU membership be a factor if a crash is to eventuate?
The other side of the coin is demand and supply. Home Builders Federation deputy chairman Peter Andrew is quoted as saying that Britain is still “one million homes short of what the country needs.” Few dispute that there is an acute, fundamental housing shortage, and this, by definition, should arrest any slide – coupled with the fact that demand for housing will never realistically cease, and could surge if mortgage rates were to drop even lower.
Making sense of it all
Trying to predict the future tends to be perilous – even for economists. But, like we’ve said before, we are firm believers that the effects of market turmoil and recessions can be exacerbated, and even fuelled, by changes in consumer behaviour. The decisions we take on a daily basis about our purchases, investment prospects and even businesses have a direct knock-on effect to the wider economy, so we all need to play our part in maintaining overall consumer confidence.
Of course, that’s not to say that a big decision like purchasing a property should be made without factoring in disconcerting external issues such as these. But property in particular should always be viewed as a long-term investment, so, whether you’re considering buying or selling, it’s important to weigh this up against any short-term upheaval. And, as far as possible, heed the words of the now-famous poster unveiled to the British public at a time far more turbulent than this: Keep calm, and carry on.
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