How Likely Is A Post-Brexit UK House Price Slump?

The most popular position on UK house prices within the context of Brexit is that once there is some clarity, with the exception of a chaotic no deal scenario, pent-up demand will be released in a gush of relief. Sellers that wanted to sell and buyers that wanted to buy but were holding off due to Brexit uncertainty will start to buy and sell homes and re-energise a sluggish market characterised by stagnating prices and falling transaction volumes.

But how likely is that really? Even in London and the South East where prices dropped slightly in 2018, there are still many market observers who believe the affordability threshold has simply been passed, leaving little room for further growth. Other regions of the UK can be argued to also be approaching that threshold if prices have not already reached it. With interest rates already rock bottom and likely to go up more in coming years, the cost of borrowing will also rise. Many analysts are of the opinion that the price rises over the ten years since the financial crisis were in large part the result of how cheap it was to borrow.

Sure, there is a housing supply deficit in the UK that other analysts and those in the property point to as the argument why prices still have space to grow. But if people simply can’t afford to pay more and debt being more expensive means they have to borrow less is there any way for prices to rise much further before a real and significant increase in incomes? Before that happens, if it does, how likely are we then to see house prices see a significant correction in the wake of whatever form of Brexit does materialise over the coming weeks or months? It’s an important question for many, from first time buyers to landlords with one or more investment properties.

Of course, much depends on what kind of Brexit we do eventually have and how bad an impact that has on the UK’s wider economy. One positive is that if the economy does run into serious trouble interest rate hikes by the Bank of England will almost certainly be paused. And while the current interest rate benchmark is still a historically tiny 0.75% and there isn’t much scope for it to be cut it could conceivable be taken back to zero again. The combination of stricter mortgage qualification conditions having been put into place since the last market crash and the unlikelihood that rising interest rates will make mortgages unaffordable offer comfort prices won’t slump drastically in the wake of Brexit.

The pessimists on post-Brexit UK house prices point to Japan. The country’s 1980s economic boom led to a house price bubble that burst spectacularly in 1992. In 2018 prices were still, in real terms, 39% below that early 90s peak. Since then Japan’s reality has been one of low interest rates and low inflation. Some economists believe that in Europe and the US we are approaching the point in the economic cycle Japan reached 30 years ago. In the case of the UK, that could be accelerated by Brexit. So if prices do drop it is feasible they never recover this time, or at least in the manner we’ve grown accustomed to, with prices coming back over decades rather than years.

However, as always, what the reality will prove to be is very difficult to tell. If there is a significant or mild price drop it will be welcomed by many as an opportunity to buy. The question is how quickly prices will then bounce back.