The decision to leave the European Union means the near term prospects for the UK housing market now look very uncertain.
The immediate impact is likely to be a fall in housing turnover and a rapid deceleration in house price growth as buyers adopt a wait and see the short term impact on financial markets and the economy at large.
At present we don’t expect sizable house price falls, the greatest impact will be on market activity. Widespread house price falls require forced sellers and in the short term we are unlikely to see an upsurge in forced sales. The most likely drivers of forced sales will be higher mortgage rates or rising unemployment. While there will be turmoil in financial markets in the short term it is too early to say how this might play out on borrowing costs and jobs but the risks are clear. Any increase in borrowing costs will boost demand for re-mortgaging but the outlook for home purchase lending is less certain.
One positive stems from tighter lending criteria in recent years and relatively low levels of higher loan to value lending with new borrower affordability being stressed at higher mortgage rates. We expect levels of new housing to be scaled back, tightening supply and supporting prices until such time as the outlook for demand becomes clearer. Builders had been slowing starts ahead of the vote and on concerns over the Starter Homes initiative.
In our view the decision to leave the EU will be most keenly felt in the London housing market which is fully valued and already facing headwinds. History shows that external shocks have led to falls in turnover by as much as 20%. London has already seen a 7% drop in turnover over the last year. House price growth in the capital varies between double digit growth in lower value areas and weaker, low single digit growth in central London areas. Modest single digit price falls now appear likely in higher value markets as prices adjust in the face of lower sales activity and weaker investor demand. Even a sharp, prolonged fall in the Sterling is unlikely to attract overseas buyers in the near term.
Across the whole London market, where house price growth is running at 13%, we expect the rate of growth to slow rapidly on greater uncertainty and market activity in the capital is set to remain disrupted until consumers and the financial markets can see a clear strategy to manage the process to a position where the outlook for the economy, jobs and mortgage rates becomes clearer.
The Hometrack UK cities index will be published at 7.30am on Tuesday 28 June with more reaction and analysis on what this means for housing demand, transaction volumes and house price growth across UK housing markets.