Following the UK’s exit from the European Union, Professor Damian Damianov considers its impact on the housing market.
On 27 June 2016, the Monday after the Brexit vote, I rang my landlord to notify him that I was ending my rental contract. “What!” he exclaimed, unable to conceal his alarm and apprehension. He was fearing further phone calls on that day as, when events occur in short sequence, one tends to believe that they are somehow interrelated.
All the financial havoc and political turmoil in these early post-Brexit days was certainly not helping him remember how he’d hiked my rent up a few months earlier. At the time, in a matter of just a few short days, the British pound plummeted to a 30-year low and the FTSE plunged more than 8% causing a double whammy for investors.
Nothing to fear
Yet, my landlord had nothing to fear. The housing market has multiple layers of protective coating, making it resistant to external shocks. Firstly, in a free-floating system, exchange rates absorb political and economic shocks almost instantaneously making all goods and services, and in particular real estate, cheaper to foreign investors overnight. And secondly, only about a month after the vote, the Bank of England intervened and further lowered the official bank rate down to a 0.25%.
Consequently, mortgage borrowing became even more attractive. Both effects boosted demand and shored up confidence in the housing market, swamping the negative economic expectations. Indeed, in the nearly five years of Brexit negotiations and uncertainty, house prices remained surprisingly stable and even enjoyed a moderate growth: all major house price indices (Land Registry, Nationwide and Halifax) are up on average about 15% since the Brexit vote.
The powerful forces of these two mechanisms were again on display in the early stages of the Covid-19 crisis. The initial shock of closing the UK economy was absorbed by the exchange rate. In the first two weeks of March last year, the British pound fell 12% against the US Dollar. And when the government responded with economic stimulus, put a furlough scheme in place and a stamp duty land tax holiday, house prices surged as soon as the housing market reopened.
With all these protective forces at work, is it going to be smooth sailing and steady growth for the housing market as we emerge from the pandemic? Certainly, the end of the transition period and the completion of Brexit at the start of the year has had less impact than Covid-19. For now, inflation and rising interest rates appear to be the primary risk factors, but they are not yet in clear sight on the horizon.