How will Brexit affect UK house prices and mortgages?

The UK’s housing market appeared little affected by the 2016 vote to leave the EU, despite a pause after the surprise referendum result as householders took stock.But as the moment of departure in March 2019 approaches, estate agents say the unknowns surrounding Brexit are weighing on the property market. Surveyors said in September that the outlook for prices in three and 12 months’ time was the lowest since June 2016, with Brexit the key concern among buyers, according to the Royal Institution of Chartered Surveyors’ monthly survey. Concern was concentrated in the capital.A warning last month by Mark Carney, governor of the Bank of England, that a disruptive no-deal Brexit could cut 35 per cent off house prices added to the market jitters, Rics said.Mr Carney’s warning represented an extreme scenario, and the ultimate effects of Brexit on house prices and mortgages will depend on the details of any deal and their repercussions for the economy.But in the meantime, some parts of the market have become highly sensitive to developments in the Brexit process: after Prime Minister Theresa May’s humiliation on Brexit at the Salzburg EU summit in September, “we had three deals fall out of bed”, says Jonathan Harris of the London-based mortgage brokers Anderson Harris.

Here are some factors for households to consider when deciding whether Brexit should affect their decisions on house purchases and sales.

What effect is Brexit having on markets now?
Housing markets in London and the south-east have slowed: prices in London fell 0.7 per cent in the year to June, according to the Office for National Statistics. Transaction levels in the capital are down 20 per cent year on year, said Neal Hudson of Residential Analysts. And the number of homes being placed on the market for £2m or more was down 25 per cent in the third quarter of 2018 compared with a year before, according to property data company LonRes. Across the country, however, average prices remain on the rise — they increased 3 per cent in the year to June, down from 3.5 per cent a year earlier. The rise was propelled by regional markets. Scottish house prices were up 4.8 per cent to £150,000 on average, while in eastern England they rose 3.3 per cent to £292,632.Such trends were due to a number of factors, said Lucian Cook, director of residential research at Savills — among them lower numbers of investor-buyers and stretched affordability in the UK’s most expensive markets.“Markets in London and the south-east are close to the limits of mortgage regulation; there just isn’t that capacity to stretch loan-to-income ratios,” he said.

The Brexit Files: Can Brexit be stopped?
But these concerns are aggravated by worries about Brexit. “To date, the impact [of Brexit] has been to create this underlying uncertainty which has meant that sentiment has been quite fickle, and the consequences of that have been a dramatic slowing in house price growth,” Mr Cook said.“It’s more heightened in London than in the north of the country because the financial commitment of buying in London is that much more.” In Rics’ latest survey, Brexit was cited as a reason for market slowness by London surveyors — but also by some of their counterparts in the north and Midlands.Ray Boulger, technical product manager at broker John Charcol, said Londoners and those nearby were more likely to feel directly affected by the Brexit outcome: “In London it’s more of an issue . . . some people are concerned about their jobs, but for the vast majority of people outside London and the south-east it’s not a major factor.”Brexit uncertainty was cutting into demand from EU buyers, he added, but a weakening currency could also make UK property look more attractive to overseas buyers.

How will the property market play out as the Brexit date approaches?Householders in areas where prices are falling already have an incentive to wait and see rather than commit now.But analysts said that when it comes to Brexit, the crucial moment for householders will not be the scheduled exit from the union on March 29 2019, but the formation or collapse of any transition deal — an issue at stake at an EU summit this week and a possible further meeting in November.Mr Harris said the market could “recover quite quickly if there is a semblance of a reasonable deal”. “But if people keep holding back, that is a self-fulfilling prophecy,” he said. He added that in the absence of an agreement the markets in London and the surrounding area would probably continue to weaken.Analysts at UBS noted that in previous cycles, a London downturn had preceded a decline in the broader market. But that might not be the case this time, they said.“The Bank of England thinks this time may be different, as the capital is more exposed than the national market to stamp duty changes and is more likely to be impacted by the departure of EU nationals,” noted UBS’s Osmaan Malik.What about mortgages?A silver lining of the Brexit process, said Mr Boulger, had been low interest rates. “The uncertainty of Brexit is helping to keep mortgage rates low and hence the costs of home ownership low,” he said.In August the Bank of England raised the base rate to 0.75 per cent from 0.5 per cent, only the second rise in a decade. Mr Carney has indicated rates will continue to rise, but slowly.Householders have increasingly been locking in their existing mortgage rates through five-year fixed-rate deals in expectation of those increases.After the referendum vote, the Bank of England cut rates to a record low of 0.25 per cent as part of a package of measures designed to avert recession. But in the event of a disorderly Brexit, Mr Carney has told ministers a similar measure would not work and rates might have to rise to curb inflation.This would push up mortgage costs, while rising unemployment — which could make mortgage lending more risky — might also cause lenders to increase rates.What about the long term?Any transitional Brexit deal would need to be passed in a parliamentary vote. If the agreement was approved by Westminster, markets would be reassured to a degree. But this could leave important details to be determined as part of a longer-term agreement with the EU.“There’s a question of how long does the uncertainty last . . . [and then] it is about the economic consequences of whatever deal is agreed,” said Mr Cook.Most projections indicate that Brexit will weigh on economic growth; UBS analysts said a “soft” Brexit would cumulatively cut about 6.9 per cent from gross domestic product over five years, while a “hard” Brexit would lead to a 10 per cent drop.Most of the total costs would occur in the first 12 to 18 months after departure, they argued, as trade barriers were put up and businesses relocated.The Bank of England has said its stress tests indicated banks could support the economy through a “disorderly Brexit”, since they had passed tests covering a scenario more severe than the 2008 financial crisis.

Analysts at UBS said the housing market might also prove relatively robust, for a range of reasons including the government’s Help to Buy scheme, which was bolstering new-build home transactions.“[There are] no visible signs of distress in the financial system, hence we see no reason to expect any sharp reduction in mortgage lending,” they said. Few analysts, however, expect a repeat of the strong growth that took place from 2011 to 2014, still less the even stronger rises of the early 2000s.