“It is too early to celebrate the success of Brexit”, warns EY in its latest ITEM Club forecast, as the real economic effects have yet to materialise. Analysts predict that the increasing likelihood of a “hard Brexit” – which culls access to the single market – is “likely to take about 4% off UK GDP by 2030”. And the property market is likely to suffer…
Housing investment is predicted to drop by 1.7% next year, with average house prices due to drop for the first time since 2011, by 0.2% in 2017.
Financial services – a load-bearing column of the Prime Central London property market – are vulnerable to being shifted out of the UK onto the continent if “hard Brexit” results in global trade terms under World Trade Organisation rules (which seems very probable, at least in the medium-term). That’s going to have a big effect on both the top-end sales and rental arenas in London.
And wider Brexit-fuelled uncertainties mean that economic growth is not looking particularly rosy over the next decade or so, with household spending, corporate investment and employment all likely to fall…
“Business and housing investment are especially vulnerable to this heightened mood of uncertainty”, says EY, with short-term stimulants (relaxed fiscal policy and a dirt-cheap pound) keeping things up for the next 18 months – before investment really starts to fall down.
EY’s forecast sees business investment falling by 1.5% this year and by another 2.3% in 2017, and house prices falling for the first time since 2011, although by a very marginal 0.2% next year.
The weakness of real incomes and house prices will be reflected in housing investment, say analysts, as well as spending on big-ticket items such as appliances and of course motor vehicles. The forecast sees housing investment growing by 2.9% this year after 3.7% in 2015, but then falling by 1.7% in 2017.
All the economic and political uncertainty makes any forecasting slightly ridiculous at the moment, and the housing market has been further clouded by distortions either side of April’s stamp duty changes. But EY has followed a few other brave research units and had a stab anyway.
Some trends have emerged despite the murkiness: there does appear to have been a slowdown in activity compared with 2015; over the three months to August (by which time any short-term stamp duty distortions should have worked through), transactions averaged 97,000 per month, down from 104,000 in the same period of 2015. It is a similar story with prices, with annual price growth in the 5-6% range now, compared with the high single digits last year.
The RICS has reported a substantial slowdown in new buyer enquires, which as of August had fallen for five successive months, and EY expects demand-side factors to offer less support to activity and prices moving forward. In particular, employment is expected to fall over the next year, while real income growth is set to slow sharply. However, there will be some offset from looser monetary policy, with the MPC having cut Bank Rate to 0.25% in August and indicated that it may cut again later this year.
“The likely Brexit impact on the Prime Central London investment market is also uncertain,” note forecasters. Heightened economic uncertainty may be dampening confidence, but the sharp depreciation of the pound has made central London prices look much more attractive to foreign buyers.
We see no reason why there should be a sharp correction in property values
On balance, EY expect to see housing market activity “remaining relatively stable at close to current low levels, with price growth continuing to moderate in line with the weakening of the labour market and household income growth. However, with the softer economic outlook unlikely to trigger a material rise in forced sales and housing supply set to remain very tight, we see no reason why there should be a sharp correction in property values. After rising by 7% in 2016, our forecast shows house prices broadly flat next year, before they subsequently begin to rise from 2018.”
Read the full EY ITEM Club Forecast here (PDF)