Brexit doorPosted: June 22, 2016 | |
Originally published on June 16 on Inside Edge 2, my blog for Inside Housing
In two days’ time you could be having your breakfast to the news that the UK has voted to leave the European Union.
Whether that thought makes you choke on your cornflakes or rejoice that this is the last time the blurb on the box will be dictated by Brussels, I think we can all agree that the consequences will be profound.
Housing has only featured as a second rank issue in the campaign, well behind the economy, immigration, sovereignty and our place in the world. Yet the effect of a Leave vote on the housing market is just as much a part of Remain’s pitch as the housing impacts of immigration are part of Leave’s.
So what if Project Lie really does beat Project Fear on Thursday?
First off, the economics. If the warnings about a severe shock were only coming from George Osborne perhaps I could accept Iain Duncan Smith’s claim that it’s all scaremongering. At least I could if IDS hadn’t said exactly the same every time someone criticised the bedroom tax or the benefit cap.
But these warnings are coming from the vast majority of economists. To take one example, the Institute for Fiscal Studies found that the mechanical effect of leaving the EU would be an £8 bn gain to the public finances but that would be more than wiped out by losses in national income of £20-40 bn.
Whatever Michael Gove’s ‘experts’ say, the prospect of Brexit is already having an impact on share prices and on housebuilding and the housing market. In the last few days, Crest Nicholson has said it will stop buying land and taking on staff for several months and warned that Brexit would slow down imports of building materials. Berkeley Homes triggered a fall in housebuilding shares when it revealed its reservations were down by 20%. Moody’s has warned that housing associations’ borrowing costs could rise as the UK’s credit rating suffers after Brexit.
An open letter signed by 17 housing associations, housebuilders and developers warns that a Leave vote would create ‘considerable uncertainty’ . They go on: ‘We know what this will mean: investment will suffer as confidence in the economy wavers. That is the last thing Britain’s developers and house-builders need.’
The Treasury forecast that the shock of Brexit would mean a 10% fall in house prices compared to current forecasts by 2018 and a severe shock an 18% fall. The hope was clearly that existing home owners would vote with their wallets but for private renters locked out of the market this would be good news.
Except that the history of external shocks to the housing market, and the extent to which our house prices are over-valued against earnings and rents, suggests that the impact could quite easily be greater than even the Treasury thought. As Peter Saunders argued in a report this week, the fourth housing boom since the war is the only one that wasn’t followed by a bust. Now it could be with a vengeance.
If lower house prices (and them rendering starter homes pointless) represent the hope in that scenario, then the rest of the Pandora’s Box could be filled with negative equity, repossessions and severe financial consequences for mortgage lenders and housebuilders.
But the impact would also be felt in an increasingly diversified and commercialised social housing sector. As in 2008, housing associations could be left with homes they are unable to sell and land worth less than they paid for it. Is the sector as resilient as it was then?
A housing market crash is of course quite possible even if Remain wins next week’s vote. However, on top of all that, there’s the warning from George Osborne and Alistair Darling on Wednesday that a Brexit vote would trigger an emergency budget to fill a £30 bn black hole in the public finances. In effect it would be the last five years of austerity all over again with yet more cuts to housing investment and housing benefit. Except that Labour and Tory Leavers say they would not vote for it.
The Outers argue that the economic shock will not happen. It will take years to negotiate the Brexit, the rest of Europe still needs us a trading partner and Britain can look to the rest of the world. A falling pound would help to stabilise the economy to deliver a new era of growth.
Lower house prices would be good news for would-be first-time buyers, though not if they lose their job in a recession and not if the Bank of England is forced to raise interest rates. However, lower prices and a lower pound would be even better news for foreign investors interested in the property markets of London and other UK cities.
That begs the question of what a Leave government’s attitude would really be to immigration. ‘Taking back control’ might have won them the referendum but the need for migrant labour in a country with an ageing population and severe skills shortages in the building industry will not have gone away. Australia, Canada, Norway and Switzerland, all countries quoted as examples a Brexit UK could follow, all have net migration rates higher than us.
Second, the politics. The Brexit vision seems to be of Britain as a sort of European Singapore, free to trade its way to prosperity and able to complete the Thatcherite revolution that was thwarted by Brussels.
The most obvious political consequence might therefore be a much more right-wing Conservative government: prime minister Boris Johnson and chancellor Michael Gove joined in the Cabinet by Europe minister Lord Farage and communities secretary Iain Duncan Smith. High on the domestic agenda: IDS’s crazy scheme to give away all social housing.
Except that as things stand they would not be able to get right-wing policies through the Commons and in any case they would be far too busy dealing with the Brexit fall-out.
So the real political impact could be felt after the next election (in 2020 or maybe earlier than that if there is political deadlock at Westminster). As things stand, another Conservative victory over a moribund Labour party looks odds-on. Would the deep Tory divisions exposed in the referendum campaign damage their chances or would Labour emerge as hollowed-out in England as it was in Scotland?
And what if Brexit is followed by Scexit, as the SNP wins a second independence referendum triggered by a Scottish vote to stay in the EU? As things stand, that would mean a permanent Tory government in the rest of the UK, but would the centre of political gravity shift in response?
I could be wrong of course. The Brexit government might rediscover the merits of social housing just as it seems to have rekindled its love for the NHS and regional development funding. But none of these political scenarios look like good news for housing.
Third, the social and legal consequences. Leaving the EU would mean leaving behind programmes like the European Regional Development Fund and European Social Fund. For Wales, Cornwall and other parts of the UK that are net beneficiaries the question is whether Westminster would make the same choices as Brussels. Vote Leave says it would but why ‘take back control’ only to make the same choices? Why preserve European funding when you’ve scrapped regional development funding in England since 2010. Meanwhile, the European Investment Bank would unsurprisingly scale back its lending on social housing.
However, Brexit would also open up the possibility of changes in housing policy that are currently blocked by EU law. VAT offers one example: new homes are currently zero rated but refurbishment of old ones is taxed. That balance could be shifted. The rules on state aid are another: these have not impacted on UK social housing so far but private landlord groups have taken housing associations to court elsewhere in Europe over unfair competition and won.
In contrast, if we leave the EU but stay in the European Economic Area (one Brexit option and like Norway) we could still have to abide by EU rules without having any say in making them.
And if we leave the EU, how about leaving the European Convention on Human Rights? Many Outers simply lump the two together as ‘Brussels’ but the position is confused, with Theresa May wanting to say in the EU but leave the ECHR and Michael Gove apparently wanting the opposite. UK welfare reform may seem untouched by Europe but many of the legal challenges to it, including bedroom tax cases currently with the Supreme Court, rely on the ECHR.
As for me, the choice was made long ago. I don’t have much time for Project Fear but even less for Project Lie. Apart from anything else, if Boris Johnson, Iain Duncan Smith, Nigel Farage, Rupert Murdoch and Vladimir Putin are on one side then I’m on the other. I’ll be choking on my cornflakes.