Home alone: what Brexit could mean for housingPosted: June 24, 2016
Originally published on June 24 on Inside Edge 2, my blog for Inside Housing
As the dust settles on the momentous vote for Brexit, the one certainty seems to be uncertainty.
I blogged last week about what would follow a Leave vote that seemed a possiblity but no more than that. Here’s my updated take on the likely consequences for housing now that it’s a reality.
The markets are signalling, no screaming, that they expect huge dislocation. Shares in leading housebuilders led the stock market plunge, with falls of 40% or more at one stage, and banks were not far behind with falls of 25%.
You could read this as a signal that the City expects house prices and land prices to fall with severe impacts for both – or as a reaction to panic and uncertainty.
Either way, there will be short-term consequences. Housebuilders look certain to scale back development, stop opening new sites and hold off on decisions to invest in land. Equally, few people will want to buy in a market that could be about to see prices fall and the wider market will stall.
In the longer term, a fall in house prices needs a trigger. The widespread expectation that prices will fall could be it and the timing and context could reinforce that. The market was looking fragile even before the Brexit vote, especially in London and especially at the top end. Expectations of price falls could turn to contagion and a correction turn into a slump.
In this scenario, banks will stop lending in a falling market, buyers will wait until homes are cheaper, and development projects will be scrapped or mothballed. To coin a phrase, buyers will stop buying, lenders will stop lending and builders will stop building. Which is just as well because there soon won’t be enough building workers to build them in any case.
Housing associations will not be insulated from this process. We saw what happened in 2008 and they are now even more tied in to the wider market via development for sale, joint ventures and the like. Falling land prices mean writedowns, falling house prices mean homes that cannot be sold and at a bare minimum the risks mean development ambitions scaled back.
Against that, falling prices will eventually price people back into the market and lower house prices would be some sort of compensation for young people who voted heavily to Remain. Perhaps if it crashes the economy Brexit will take the pressure off housing because fewer people will want to come here.
The falling pound already means UK homes are 10% cheaper than yesterday to foreign investors but will they still want to invest in a Brexit Britain? Cheaper house prices would be a good thing – but not if you’ve bought one recently and about to go into negative equity and not if you lose your job as the economy tanks. And if the prospect of heavily indebted buy-to-let landlords getting their comeuppance looks like cause for celebration, what happens to their tenants?
And what will the Bank of England do? One view says it will cut interest rates again or reintroduce quantitative easing, which would act to prop up prices. Another says the falling pound will lead to higher inflation and force the Bank to increase rates. Decisions by rating agencies and the banks could raise borrowing costs (for home buyers and housing associations) independently of what the Bank does. Higher mortgage costs could trigger another fall in house prices, reinforcing the scenario above.
Current housing policy will not be able to cope with a market shock because it relies so heavily on that market to deliver.
The first casualty will be the government’s target of a million new homes by 2020. As housing minister Brandon Lewis told Inside Housing on Tuesday:
‘To continue towards our target of one million new homes – and meet that commitment on affordable housing – I am convinced that the UK cannot afford to leave the European Union. I know now that the vast majority of our housebuilding industry – and the investors who underpin it – agree with me.’
Both he – and the House Builders Federation – now have an excuse for abandoning that target.
But the consequences could be even more severe for housing policy under the dislocation scenario I outlined above. To take two quick examples:
Starter Homes: what’s the point of a scheme to deliver homes at a 20% discount if prices are already 20% lower anyway? Who will want to build them? Who will want to buy them or lend on them in a falling market? Could they morph into a way of keeping housebuilders afloat?
Help to Buy: equity loans, mortgage guarantees and a range of other schemes to support the sales and rental markets rely on financial instruments not actual public money. At the last count these totalled more than £33 bn. A falling housing market could trigger losses that will expose the public finances.
In my dislocation scenario, current housing policy will be bankrupt. The alternative is a major public building programme of homes for rent and homes for rent and eventual sale. We missed the opportunity after 2008. We must not miss it again.
But will we? One way or another the Brexit vote seems set to lead to a more right-wing Conservative government that could be even more hostile to social housing. In the short term say it’s goodbye to David Cameron and maybe George Osborne and hello to Boris Johnson, Michael Gove and maybe Lord Farage; in the longer term say goodbye to an independent Scotland and a huge Tory majority in the rump UK.
A ‘punishment’ budget may yet turn out to be an exaggeration by George Osborne and Project Fear but it’s not hard to see that there will be more cuts to come. The prospect of a EU departure dividend to spend on the NHS and other good causes has already been exposed as one of Project Lie’s biggest porkies and one of the main targets of the Brexiteers will be European social legislation.
Political business that was on hold pending the referendum will now have to continue. Among the big housing issues on the agenda are the LHA cap and its impact on social, sheltered and supported housing. Increased pressure on the public finances will make a Treasury u-turn less likely but could there be more Tory rebels now? Several sets of regulations are still due on the Housing and Planning Act too.
In the longer term, unless you’re inclined to dismiss the vast majority of economists as Nazis or ‘experts’, the country will be worse off and the poorest people in the country will be the ones that feel it most.
And we still don’t have a clue what Brexit means. Will we be in or out of the single market? Will it be with or without free movement of labour? Will we slow down globalisation or embrace it even more? This week’s vote is not legally binding. Could there yet be a second referendum on the Brexit deal? Or another general election before then?
The Brexit vote revealed a country divided down the middle. London, Scotland and Northern Ireland, voted to Remain. Everywhere else to leave, even areas like the Valleys and Cornwall that benefit most from EU funding. Voters divided by age, wealth and education and of course attitudes to immigration.
But housing is severely divided too. Ipsos MORI’s final poll yesterday indicated that social tenants were set to vote 62:38 to leave alongside outright owners (55:45). In contrast, private renters were favouring Remain by 64 to 36 and mortgage payers 59 to 41. These are indications from a poll that got the actual result wrong so the divide in the actual vote could be even greater.
Age is clearly a key influence on these figures (outright owners and social tenants are older, private renters and mortgage payers younger) but the divide is still stark. So too is the difference within social housing: a survey by Inside Housing found that 92% of housing association chief executiveswould vote Remain and 76% expected a negative impact on their organisation. It’s tenants not chief executives who will suffer but that’s a complete disconnect that should worry everyone.