Brexit: house price crash worse than the credit crunch?
30/01/2019
853
22 min read
With Brexit approaching - at press time the United Kingdom being set to leave the European Union on 29th March 2019 - many commentators are talking up the current fall in house prices as a sign of just the start of things to come in the event of a no deal 'cliff-edge' withdrawal. Will house prices fall as low and for as long as back in 2008? How long will they take to bounce back? Is London taking a bigger hit? What other similarities are there between the current housing market decline and the crash in 2008?
Additionally will a housing price drop give a window of opportunity to would-be cash-strapped home buyers or will a damaged UK economy merely compound the housing crisis?
There are vast data sets to examine however our article below examines some of the fundamental ones* and uncover which variables, if any, show continuity with events of a little over a decade ago and gives a tentative forecast on what might happen in the UK housing market, given the numerous uncertainties prevailing.
Do England and Wales' average house prices and sales volumes give any clues?
Prior to the crash, in 2004-5 sales volumes dropped considerably from a peak of 132,944 in July 2004 to a trough of 55,980 in January 2005 - with volumes recovering to 101,353 in July 2005. However average house prices did not fall as a result of the stalling market; they rose to £158,270 in November 2004 and although they then fell by a very small amount - to £156,546 in February 2005 - they then rose again and by April 2005 they reached a new peak of £159,291 and the steady march upward continued until September 2007 (£192,258) after which the effects of the credit crunch-related crash set in.
Buyers can't afford the asking price
During the period 2004 - 2005, most experts in the media explained that the cause of the fall was linked to buyers reaching the limits of their budgets regarding price rises but sellers refusing to allow property prices to fall to any appreciable extent.
The National Association of Estate Agents (NAEA) reported in July 2018: "The number of sales agreed per branch decreased. A fifth of properties sold at the original asking price..." With 80% of properties being sold under the asking price and a falling number of agreed sales raises questions of the similarity in the mood of sellers asking for sale prices that buyers can't afford.
In fact according to the NAEA's figures, updated monthly, the vast majority of houses have been sold - and continue to be sold - for below asking price in recent years. For the last 2 years, this figure has never been below 70% and has sometimes been above 80%.
Source: National Association of Estate Agents - Housing Report - July 2018
If we now examine sales volumes between May 2014 to the present, we see an overall downward movement in sales volumes (allowing for seasonal effects) with the only extremity being the sudden increase then decrease between March and April 2016 which was caused by the the rolling out of second home stamp duty on the 1st April 2016. Prices over the same period have generally been rising, even if the rate of rise is stalling somewhat.
Now looking at the 2007 - 2008 credit crunch and the ensuing property prices crash itself, average property prices dropped 22% from their September 2007 peak of £192,258 to the trough of March 2009, £157,355. From March it took 5 years and two months before we saw house prices beat the previous high in May 2014 of £192,279.
Sales volumes fell dramatically - from 102,973 in November 2007 to a trough of 26,954 in January 2009 before recovering.
However it's worth noting that:
- Volumes have only once been over 100,000 for a month since the 2007 - 2008 property price crash, that of March 2016, as referred to; this is notable, because for 53 months in the period between the beginning of 2000 and the property price crash, volumes exceeded 100,000
- It's entirely understandable that volumes drop in a housing market of falling prices; people wait for the market to bottom out and it's generally accepted that the best strategy for coping with negative equity is to stay put and not sell up. Additionally, all other things being equal, you can always remortgage and invest in your house to improve your own living conditions instead of trying to trade up.
One of the clearest differences visible from the graph above is the diverging of sales volumes (falling) and house prices (rising); in terms of pure economics, there are more internal reasons for a market correction than in 2007, yet neither the sudden fall in sales volumes in 2004 nor that which accompanied the roll-out of second home stamp duty managed to put a dent in prices, so experience might suggest not betting on a large price fall under current conditions before considerations of different Brexit scenarios.
Does London follow the trend?
The only difference is that prices peaked at £488,527 in July 2017 in the capital and have since flattened out, with month-on-month rises and falls, whereas prices peaked in England and Wales as recently as August 2018 (£244,764).
Although there has been much analysis of price movements in London when considering different sections of the market - many pundits have written about plummeting prices in the luxury end of the market for example - overall, there has been no great fall-off in prices, as stated, rather a flattening out. Market experts blame the second home stamp duty rules for causing this.
And as before, the market has previously sustained periods of low sales volumes without any crash in prices being precipitated.
What clues do base rates, wage rates and inflation give us?
Base rates
Base rates had been steadily rising from July 2003 (3.5%) to July 2007 (5.75%) just prior to the credit crunch, decreasing by 0.25% to 5.5% in December 2007 and January 2008, when property prices started to fall.
After this, the Bank of England dropped rates precipitously from September 2008 (5%) to March 2009 (0.5%), with the purpose being ostensibly to keep the economy from falling into a depression.
However since then, rates have stayed low (they remained at 0.5% up to August 2016, when they reduced even more, to 0.25%) and only very recently have they risen again, and only to 0.75%.
It may be argued that a property price crash might be precipitated in part by people being over-extended in terms of mortgages, however firstly, since the Mortgage Market Review, it has become considerably more difficult to get a mortgage and additionally, for those that have successfully secured one, base rates have been low so in theory, mortgage have stayed relatively cheap.
Base rates therefore don't give any clear indication of an imminent ensuing crash...
What the low base rate has done is made mortgages cheaper for home owners. Just after the crash the Office for National Statistics reported that home owners moved an average of 15.8 years, however in 2016-17 this had increased to 17.5 years. A sign that home owners are looking to stay longer in their homes finding the low mortgage interest rates a better option when compared to the stamp duty and moving costs when buying a new home.
Wage rates
Between January 2001 and December 2008, wage rates year-on-year consistently rose, with the highest rise being 8.7% in February 2001 and the smallest being 2.1% in February 2003. Even just before the effects of the credit crunch and property price crash fed through, wage rates rose 2.4% (December 2008).
The month-on-month picture similarly showed wage rates generally rising, although for 17 months during the same period (January 2001 and December 2008), they fell, with a maximum fall of 1.9% in April 2008.
Once the credit crunch had fed through, wages fell year-on-year for 3 months in a row, from January to March 2009, and February showed the highest percentage fall, 5.9%.
From April 2009 to the most recently available month's figures (October 2018), wages have steadily risen barring for 2 months. The month-on-month picture is similar, although there have been marginal falls (maximum 2.1% in March 2013) in 25 months.
However, year-on-year, the rises have been much less than for the previous period, with a maximum 3.9% (for April 2013); many commentators have remarked upon the slow pace of wage rises in the UK in recent years.
Inflation
Any consideration of wages must also take into account inflation such that an idea of the position of real wages can be understood.
Using the Consumer Price Index measure of inflation, year on year, prices had increased by between 2.1% and 3.1% for any given month, just prior to the credit crunch.
However in May 2008, the rate was 3.42%, which rose to 5.13% in September 2008, from which date it then fell, to a low of 1.2% in September 2009.
Since April 2009, inflation has gone as high as 5.1% (September 2011) but the price level actually fell by 0.2% in April 2015 and the monthly average up to the most recently available month's figures has been 2.25%.
Regarding wages though, the average year-on-year monthly rise was lower, at 1.89%, giving evidence to the point made previously, and by many commentators, that real wages have been very slow to recover since the credit crunch.
Mortgages and Remortgages
Mortgage approvals have been relatively stable in recent years. Between February 2014 and October 2018, the monthly average was 66,293, however deviation has been comparatively small with a peak of 72,581 (January 2016) and the lowest figure of 59,204 (January 2015).
Just prior to the credit crunch effects on the property market, there were 71,413 approvals in January 2008 by comparison, before these fell off to a low of 26,296 in November 2008, when volumes started rising again.
For remortgages over the same period (February 2014 to October 2018), the average number of monthly approvals was 41,773, however the deviation was much greater, with a low of 29,125 (May 2014) and a peak of 52,050 (May 2018).
The main story has been the gradual rise in remortgage numbers over this period, which chimes in logically with the decline in sales volumes: people are choosing to stay put and invest in their properties rather than spend more money than they can afford on too high property prices.
Levels of personal debt - is this a predictor of a crash?
The above graph, which shows monthly amounts of total sterling consumer credit lending to individuals (in £millions, excluding student loans) i.e. debt not secured on property, shows that once again, as a nation, the UK is seriously overdrawn in terms of personal spending.&
This is one definite measurement which, if a property crash were to occur post-Brexit, might illustrate history repeating itself. And prices are bound to fall generally if lenders, as previously, suddenly call in their loans from millions of indebted individuals.
But the whole situation is different, surely?
The credit crunch was very much tied up with massive factors external to the UK, particularly the selling of junk bonds in the US and Structured Investment Vehicles, particularly in the provision of mortgage lending to the sub-prime market via Fanny Mae and Freddy Mac. It was because a number of UK banks had invested in these markets, such as particularly the Royal Bank of Scotland, that the UK was so affected by events.
Within the UK itself, prior to the crash you could get 125% mortgages and the residential market could access interest-only mortgages - Northern Rock lead the way and paid the price. Credit checks were less stringent and there was almost a sense that lenders were generally only too happy to lend, regardless of your demonstrable ability to repay. That has all changed markedly, and the European Union has greatly increased how much large a percentage of capital banks must always hold to back up their lending.
The Brexit situation is all about uncertainty and if there is a supremely disorganised withdrawal, it is clearly going to make UK would-be property buyers - and sellers - more likely to hold onto their assets. But more optimistic forecasters would expect the friction to be for a short period only, as the UK has to adjust itself to new trading conditions and the drawing up of new agreements.
Supply (at the right price) and Demand
One fact which is not set to change any time soon, and possibly for a number of years, is the continuing imbalance in the UK property market between demand and supply - and the market needs supply at the right levels. We are currently seeing the issue seen in 2004-5; sellers supplying stock at a price that is not affordable to buyers meaning fewer transactions. One solution would be to incentivise sellers (second home movers) through stamp duty concessions to allow them to sell at a lower price making it more affordable for first time buyers. With stamp duty at £15,000 for a £500,000 family home, this can often be one of the reasons sellers have to stick to their higher sale price.
Over promise and under deliver
Governments have frequently stated that more houses need to be built - as much as 300,000 per year - however precious little progress has been made to equalise supply and demand. And demand-side measures such as schemes like Help to Buy have frequently been criticised by housing experts for exacerbating the problem and actually driving up prices while helping out a very small number for the taxpayer cost involved.
From the table above we can see that house building has been weaker since the 2008 where the private sector fell from 195,880 completed builds in 2007 to 121,500 completed builds in 2009. Since then we have never once reached the same number of completed builds, however in 2017 we saw the highest since the crash of 159,310. The developers have been accused of land banking, whether this is true or not, it is clear that by keeping new builds low and demand high developers have benefited from an increasing average sale price.
Whether Brexit will effect new builds depends on the confidence in the market. The Government is continuing to push their flagship affordable housing scheme, Help to Buy which can only be used on new builds. Add to this the appetite from overseas investors cannot be ignored with the weakened pound, for developers there is still a demand so it is likely they'll continue on at their current rate; especially with the extra attention the Government are placing on their activity.
Did the crash make us fall out of love with being home owners?
We have focused on a number of statistics to identify why sales volumes have been falling and have only once achieved over 100,000 in a month. What we haven't looked at is whether there is still the appetite to become a home owner following the 2008 crash.
In 1905 95% of the country rented, however in 2003 the ONS reported that 71% of homes in England are owner occupied - a generation of expectant home owners. Since the crash this has now fallen to 63% in the 2016-17 report. This is supported by the ONS data on the average age of first time buyers which was 31 in 2003-4 and has now risen to 33 in 2016-17.
Compared to the rest of Europe, where we used to think of countries like France as a country of renters, they now have a higher owner occupier rate than England - 64.4% (Source: Statista - Home ownership rate in selected European countries in 2017). Germany 51.4%, Italy 72.4% and Belgium 72.7%. With the UK's growing private rental market it is evident that rental reforms will be required to protect the sector such as those within Germany.
The ONS also asks another question, "what percentage of private renters expect to buy a home?". In 2010 this was 59% and it has now increased to 60%. This aligns with what the NAEA report when they state that there is an increase in home owners looking to buy, but fewer are actually having sales agreed; prices are too high.
What will Brexit do?
Brexit is causing uncertainty in the short term and the more disorderly the UK's withdrawal from the EU, the greater this uncertainty is likely to be. Uncertainty is always feared in the business world because it negatively affects markets in a variety of ways.
Traders put off purchasing decisions meaning sales volumes in markets drop, which in turn can put people out of business. Additionally people are more likely to save for a rainy day and saving withdraws money from the economy. In macro terms, foreign investors are likely to draw down their investments in Sterling, which will devalue the pound against other currencies. This is highly relevant to the UK because as the country is a net importer of goods, this is likely to cause inflation (a rise in the price level) because the pound will buy importers less foreign product, which they're tied in to, because the exchange rate is acting against them. Another effect is that large foreign investors might opt to take their money and investments out of the UK in the event that it leaves the Customs Union because of fears that they will no longer be able to sell into the EU with ease. Japanese Premier Shinzo Abe obliquely pointed this out to Theresa May in January 2019 by stating how important it was that the UK left the EU 'with a deal'.
The end of frictionless tariff-free trade with the EU will have many knock-on effects. The UK Government has already conducted exercises to calculate what could happen should lorries have to queue up, blocking roads as a result of new customs border requirements. Both imports and exports would be more delayed and the whole transportation process is likely to become more expensive.
Imported goods in the short term additionally are more likely to have tariffs imposed on them making them even more expensive for importers to buy, driving some traders out of business, impoverishing consumers further and creating inflation. Economists argue that substitution will occur to act against this but most agree this will take time.
Will overseas property investors find a deal?
The falling pound is making buying a property in the UK an interesting opportunity, however does a weaker pound make buying a property still as interesting an opportunity as it has been over the last 10 years?
- Falling returns - In March 2015-16 you could see properties increase by 8%, however in October 2018 this is now 2.5% and falling. In London the average house price has been falling year on year for 7 out of the last 8 months.
- Higher one off costs - second home stamp duty effects all overseas investors and with such high sale prices, the 3% additional cost eats into returns; especially if house prices are in the stages of falling make getting a return a longer term. On a £500,000 property the stamp duty including second home rate is £30,000. Click here to use our online stamp duty calculator.
- Tax on income - A new capital gains tax (CGT) regime in the UK came into effect at the start of the 2015/16 tax year. Capital gains tax is payable by individuals at the rate of 18% or 28% upon the sale of a residential property in the UK. The rate will depend on the level of the individual’s other income that is taxable in the UK in the tax year during which the disposal occurs, and the amount of the capital gain.
Prior to 2016 the UK housing market was appealing to overseas investors, however these changes are having a material impact on this part of the sector.
What the UK housing market holds for overseas investors is security even if the returns aren't sometimes as great as capital held in other forms and locations. As a Chinese, Russian, or Middle Eastern multi-millionaire it probably makes sense for them to continue to diversify their risk by moving much of it away from where they are based in high risk markets into the more secure UK housing market. If post Brexit we can still demonstrate that the UK remains a legally and otherwise safe place to invest, then we are certain that over time an ever increasing amount of money will flow into the UK housing market.
So is Brexit going to cause a 2019 crash?
Andrew Boast FMAAT, Owner of SAM says "The crash in 2008 was a global event that caused an instant fall in sales volumes and average house prices that took over 5 years to bounce back from. Brexit won't have the same impact, however is going to be the cause of the largest double digit fall in sales volume since. I think when you look at Brexit, this is an event that will have an impact, but isn't the fundamental cause of the existing fall in sales volume which, in my opinion, is property prices have reached their affordable limit and buyers need them to fall. Second home stamp duty has had a greater effect than Brexit as it has stalled the buy to let market and made London as less appealing opportunity to investors; certainly with properties in excess of £750,000."
"In 2016 the Government's decision to increase stamp duty for second home owners 3 months before the shock Brexit vote is the start of the year on year falls in sales volumes seen in the housing market. The goal of the change in second home stamp duty was to offer more housing stock to first time buyers. What has happened over the following 2 years hasn't been the result they wanted to achieve. First time buyers have been kept away from buying due to average house prices reaching record highs. They are now faced with a crisis where properties are not affordable to buy and a reducing number of buy to let landlords forcing up the costs of private renting."
"I would like to see second home stamp duty abolished. Whilst house prices are keeping buyers from the market we need a supply of rental properties to keep rental prices down. Rising rents reduce the ability of potential first time buyers to save for the increasing deposits to buy a property."
"I think because of the high deposits required to buy a home, we will continue to see that the majority of first time buyers take their first step onto the ladder with the financial support from family and relatives. Brexit plays a factor on this as we have uncertainty that could effect the financial position of parents making lending/gifting to their children a tougher decision."
"Regarding the domestic housing market, uncertainty is likely to dampen down sales volumes further. People losing their jobs or fearing that they might is likely to make them more cautious about committing to the major expense of buying a home whereas potential sellers might stay put, knowing that they're likely to get less of a return on sale. Potential buyers might also predict a price fall further down the line induced by housing market traders wishing to raise volumes and so might also put off purchasing decisions in the hope of taking advantage later."
"Any Bank of England hike on base rates, perhaps to counter inflation, is likely to put potential buyers off even more, as it mortgage lenders will increasing mortgage rates and make mortgages less affordable/appealing."
"In terms of the supply of houses, the UK has skill shortages in the building sector and, on the face of it, it might be more difficult to recruit skilled foreign labour because of the end of freedom of movement; this of course is likely to shore up prices."
"At some point after the period immediately following the UK's withdrawal from the EU, the pre-existing impasse of low and falling sales volumes in the housing sector alongside over-inflated prices will have to give in to economic orthodoxy and prices must fall. The fundamental issue of the UK's lack of housing supply is always going to drive prices up eventually, however the speed at which this happens is likely to be strongly affected by two unpredictable factors:"
- "How strongly the economy and in particular individual purchasing power recovers. If your wages are low and inflation continues to erode any nominal rises and/or you lose your job, then it's going to retard your ability to buy a house. However as and when improvements filter through, then demand for housing is likely to rise again."
- "Foreign investors could be tempted to buy up UK property by a fall in the pound however since 2016, this investment has lost some of its appeal because of the imposition of second home stamp duty and foreign capital gains tax, among other measures."
"An interventionist government might look to stimulate matters by imposing a nationwide public sector house building programme, including specialist training to combat the shortage of skilled labour, however this would have to be paid for and is likely to be resisted by many stakeholders who have made their livings out of the status quo."
"The future is uncertain, however the issues around under supply of fresh housing stock, high house prices and a failing rental sector will still be challenges long after the end of March."
We will only ever email you our monthly housing market update; we never release these details to any third party.
FREE Online Conveyancing Process For Buyers
Our conveyancing process area includes:
- online checklists
- videos
- free downloads
- useful tips
It is completely free to use - from start to finish - and saves your progress along the way.
