What will Brexit do to house prices?

Prior to the Brexit vote, the Treasury warned that house prices would be 10% to 18% lower. Will it be proved right? John Stepek investigates.


What will happen to house prices now that Britain has voted to leave?

What impact will Brexit have on the housing market? Prior to the vote, the Treasury warned that prices would be 10% to 18% lower than they would otherwise have been by 2017/2018. Was George Osborne right to be so pessimistic? At first sight, it may seem so. Estate agency Foxtons set the tone early, warning this week that its full-year profits would be "significantly lower" than last year, following the Brexit vote. "The upturn in the second half of this year is now unlikely to materialise." The company saw its share price fall by more than a fifth on Monday as a result.

The Brexit clause

One mortgage broker told Evans: "One client said they weren't going to go ahead because they were worried about negative equity. The other one said they were going to postpone because they wanted to be in a more stable position... If a lot of people start thinking like that, it could be house-price readjustment day."

So the Treasury was right? Perhaps not. In the context of Foxtons' profit warning, note that London property was already on the ropes. The Cadogan Estate, the largest landlord in Chelsea and Knightsbridge, warned last week pre-Brexit that commercial property prices in London were heading for a fall. "The very strong performance isn't going to continue forever. The downward trend in yields has got to reverse and that will put downward pressure on property values." But the company's residential portfolio was already feeling the squeeze its value was virtually flat in 2015.

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

London-focused Foxtons itself saw sales volumes fall in the first half partly because "higher stamp duty has led many buyers and sellers to sit on their hands".

This gives a clue as to what's really the biggest threat to the UK housing market not Brexit at all, but the recent changes to the rules on stamp duty and taxing landlords. Between 2017 and 2021, landlords will gradually lose the ability to write off mortgage interest costs against their income.

Deutsche Bank reckons that the resulting squeeze on buy-to-let profits could result in London house prices falling sharply. On the one hand, buying to let will become less attractive, so demand will fall, and on the other, supply will rise as some landlords are forced to sell by negative cash-flow problems (in other words, their rent won't cover their costs any more as the tax on their profits increases).

Landlords squeezed

Of course, a post-Brexit weaker pound might in fact boost demand. Another London agent told the FT that "opportunistic overseas investors" were "scenting bargains". One Dubai-based financial worker said: "I sense a buying opportunity. The threat to the British economy has been totally overblown." Even with that caveat, we still wouldn't be keen to pick up any new buy-to-lets.

John Stepek

John Stepek is a senior reporter at Bloomberg News and a former editor of MoneyWeek magazine. He graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.

He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news.

His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.