Where next for Britain’s house prices?

At last week's roundtable discussion, the main topic on the table was Brexit. But given our captive audience of eminent economists, we just had to ask about their views on our readers' favourite topic so we did. Here's what the experts think will happen next to UK property.

John Stepek: Might Brexit make house prices in London and the rest of the UK more affordable?

Danae Kyriakopoulou: If regulations on the supply side of the market are relaxed so that more houses are built, yes. But foreign investment is also a big driver of London if the UK now looks cheap due to the weak pound, that could prop up the market.

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Andrew Lilico: There are three key drivers of the housing market: cost and availability of finance so interest rates; expectations on wage growth and employment; and the value of sterling. I think that rates will rise a bit faster than most believe but I've thought that for some time and I've been wrong.

On GDP growth and employment, I don't think that will be as bad as expected in the short term, but I expect more of the negative impact of Brexit to be concentrated in the period around when we actually leave. As for the third issue, as Danae says, with sterling at these levels, you should expect foreign money to be sucked into high-end London property.

But it's also worth considering how the government might tackle the problem of agriculture, which will almost certainly be hit hard by Brexit. Under almost any scenario, I think we will end up outside the Common Agricultural Policy, so we'll face the full 70% tariffs on this and 40% tariffs on that.So landowners could lose a packet. In New Zealand, for example, moving away from agricultural support led to land prices falling by 40%. If the government didn't want that to happen, it could relax planning rules on building in some areas to compensate.

Charlie Morris: New Zealand's dairy business boomed after those changes. They now export baby milk to China. The Chinese don't trust their own suppliers, so the New Zealand stuff trades at a huge premium. Odd markets open up when regulations change. But back to house prices. There's a wonderful house-price index that looks at Amsterdam's Herengracht district.

It goes back at least 300 years, through Tulip Mania, the Napoleonic wars, the plague and the lesson from the index is that house prices mean-revert over time. In other words, in the long run houses don't make money in real (after-inflation) terms. Applying that view to the UK, house prices are about 35%-40% overvalued. A good house-price correction is half inflation and half nominal, so let's hope for that.

Gerard Lyons: We certainly have a shortage of housing. We also tax housing at the second-highest rate in the OECD club of mostly rich countries.That surprises a lot of people, but it's true the trouble is, we tax it in the wrong way. The Mirrlees Review from the Institute for Fiscal Studies said that stamp duty was a stupid tax, and it is. Yet George Osborne raised it. So we need to change taxation on housing, and just build more.

Central London is a very different market from the rest of the UK though it's local supply, global demand. The 1991 census showed that 15% of people living in London were born overseas. That's now 38% on a par with other international cities. There's also the financing. As a developer recently explained to me, more money is coming from overseas, and those buyers want commoditised units. In the past if you bought a flat in a terraced house, say, there were security risks, utility bills individual quirks to consider.

Now if it's in a block you can work out the yield nice and simply. I once went into Berkeley Homes in Hong Kong. They were selling flats in Colindale, north London. There was a big board with details of the square footage, price per square foot, current yield, and so on. The ones that had sold were lit up in yellow. As I sat there, more and more lights were flashing up, as people put offers in. It was the most bizarre situation.

Peter Warburton: I was in Hong Kong last week and they're now selling flats in Birmingham. I must say I'm not optimistic for the London £2m-plus market. That could fall by 10%-20%. It's a strange market and I don't think it deserves its premium. But as for the rest, we've only got eight housebuilders of any size and they have no appetite for growing strongly I don't blame them. And it could take a generation to revive the smaller-unit housebuilders that we still had in 2007.

So we should embark on a large-scale commercial-to-residential conversion programme, as opposed to the small one we currently have. It's the only way we can satisfy demand, and the reality is that the need for physical commercial space is in structural decline.

Our Roundtable panel

Roger BootleChairman, Capital Economics

Danae KyriakopoulouHead of research, OMFIF

Andrew LilicoChairman, Europe Economics

Gerard LyonsChief economic strategist, Netwealth Investments

Charlie MorrisFund manager, Newscape; editor, The Fleet Street Letter

Peter WarburtonDirector, Economic Perspectives

Charlie: Yes, a great property investment is to a convert a pub into a house. Double your money.

John: What's your view, Roger?

Roger Bootle: Low build rates, population and so on all matter. But one mustn't forget the demand side I mean financial demand which can change quite quickly, by a large amount. Interest rates are critical. And the market looks extremely vulnerable. The percentage of income that first-time buyers are spending on mortgage payments is only just below the long-term average, at a time where the bank rate is 0.25%. So if we ever return to a 4%-5% bank rate probably some way off, admittedly then this market is in a dreadful state.

But from my own experience of looking for excessively overpriced houses in central London, I'd also say there's a huge amount of empty and underused property in this city. The reason it's empty or underused is that people don't regard that as they normally would as an expense and a waste. They regard it as an investment. They don't think: "I'm paying out the financing costs, the running costs, the insurance" Instead, they mentally write all that off because they think the price keeps going up. If that situation is punctured then I think you'd see substantial supply come onto the market.

For example, a lot of older people live in houses that are way too large for them. Now, I can't bear it when politicians try to lay the law down and encourage people to move people have emotional attachments to their homes. It's entirely up to them. However, the behaviour of both the tax system and the history of price rises in the UK encourages them to hang on to this stuff. So while new building is important, I think substantial supply will be released naturally as soon as this becomes a real market again.

Charlie: I totally agree. I heard a brilliant analogy recently. If you've got a £1m painting hanging on your wall right now, it's not costing you anything. But if interest rates are at 10%, it costs £100,000 a year to hang this painting. It's a very simple way of explaining interest rates and opportunity costs. And if the property bull and bond bull markets turn into bear markets, then if you live in Singapore or Hong Kong, and have a fancy flat in London that's empty all the time, you just think: "Actually, I don't need that any more." And suddenly there are a lot of flats.

Danae: Yes, but how far can rates rise? Household indebtedness in the UK is among the world's highest.

Gerard: Yes Mark Carney said that the last quarter-point cut would add £5bn to the economy in the course of a year. Start doing that in reverse and people on variable rates just get very badly hit.

Peter: As a country, though, we've got to get over the idea that higher house prices are a good thing. If the price of food went up, you wouldn't say: "Great. People with stockpiled food are much better off."

Roger: I think people are coming round. Political discourse over the last few years is beginning to pay much more attention to those people who were priced out of the market and can't get in.

Charlie: Yes people with good jobs in their late 30s who can't buy and think: "What did I do wrong?"

Roger: Exactly. I don't think that's sustainable economically, and politically it could be a time-bomb too. So a period in which prices eased back considerably would do us an awful lot of good.