Since the U.K. voted to leave the European Union almost three-and-a-half years ago, the two words “Brexit uncertainty” have weighed heavily on the nation’s real estate market.
Buyers and sellers have paused, waiting in the wings for some clarity on how Brexit will take shape. Meanwhile, price growth has stalled, transactions have fallen, and confidence in the market has taken a hard hit.
Annual house price growth in the months leading to the Brexit referendum hovered at around 5%, according to Nationwide’s house price index.
But the bank and mortgage provider’s most recent data showed that home values in the U.K. have now been rising at rates under 1% for 10 consecutive months, and in September, crept up just 0.2% compared to the same time last year.
Transactions have suffered a similar fate, with fewer homes selling in the U.K. during the first six months of this year than at any point in the last decade, according to a report from real estate agency Savills.
The current deadline for the official exit on Oct. 31 is fast approaching and the outcome will shape how the real estate market proceeds over the coming months and years.
The three most likely scenarios expected to unfold by the end of the month are as follows, according to investment banking company UBS: a further delay; an exit deal is struck with the EU; or the U.K. leaves the EU with no deal.
Here’s how the effects will reverberate across the real estate market, according to experts.
Scenario 1: Brexit is Extended Again
A further extension is considered the most probable Brexit scenario, according to UBS, and if that’s the case, then little change from the current state of affairs is expected.
“Since the referendum, you’ve seen house price growth right across the U.K. fall from 5% to effectively flat,” said Lucian Cook, head of residential research at Savills. “That is reflective of the fact that despite incredibly low interest rates, continuing low levels of unemployment and good wage growth, [the market is] heavily dictated by sentiment.”
That will likely continue in the event of a further delay, according to Mr. Cook.
The market will remain needs based and price sensitive, with no great improvement in transactions, he predicted.
But if another extension is granted, there is also a risk that “some of the malaise that you’ve had in the market extending out from London will extend [geographically] a bit further,” Mr. Cook said.
London’s property market has been hit harder than any other region since the referendum, further compounded by affordability barriers and increased stamp duty taxes for high value homes—of which London has many. In turn, the generally pricey regions closest to the capital have seen the most similar—and most sluggish—market conditions.
The extent of any changes in the market will depend on how long a potential extension is pushed back, according to Aneisha Beveridge, head of research at estate agency Hamptons International.
In March, when it was announced that the deadline was going to be postponed from later that month until October, there was a bounce back in activity. “People thought ‘I’ve had enough, I’ve been waiting to see what happens and now we know nothing’s happening,’” Ms. Beveridge said. “If we see another longer extension, we’ll see that come back into play,” in the form of an increase in transactions.
But the closer the extension is, the less likely renewed transaction activity will be, she said.
Sterling would benefit from a further delay, with the pound’s value against the dollar expected to rise to between 1.25 and 1.29, according to UBS. It currently stands at 1.24.
Scenario 2: A Deal is Made With the EU
It’s not considered likely that a Brexit deal will be reached by Oct. 31, but it is thought of as the smoothest outcome.
If an agreement between the U.K. and the EU is reached, “consumers and house buyers are likely to heave a sigh of relief,” Mr. Cook said.
“A deal will bring back some kind of certainty and confidence in what the next few years will look like,” according to Ms. Beveridge. “Confidence is so important. A home is often the most expensive thing people will buy and it’s a scary thing in uncertain times.”
A deal is expected to bring an uplift in activity as buyers who had been delaying their real estate decisions until a conclusion was reached regain confidence and return to the market.
Alongside a burst of activity, a return to growth is also to be expected, but both are “unlikely to be sustained,” Mr. Cook said.
“People will see that after a while, our fading relationship with the EU will still take time to work out,” he said, and there will be a “slightly sober realization that just because we’ve got a deal, it won’t exactly be plain sailing.”
There’s also a risk of price corrections from the release of pent-up demand on the market. More than three years’ worth of people who haven’t put their houses on the market could create a “Brexit bottleneck” leading to more supply and falling prices as a result, Mansion Global previously reported.
But according to a report from accounting organization KPMG, little change in house prices is likely to be witnessed for the rest of the year in the case of a deal, although the North West is expected to see the fastest growth in 2019, rising 1.6%.
The region is one of the more affordable in the U.K., and has continued to see continuous annual house price growth since the referendum in 2016. As recently as July, the North West was logging some of the highest—albeit still modest—growth across the U.K., according to data provider Acadata.
Next year, house price growth is predicted to rise 1.3% nationwide, with the region of Yorkshire and the Humber slated to lead with increases of 2.4%, according to KPMG.
Like the North West, Yorkshire and the Humber has seen property prices growth since the referendum, though growth flatlined in July at just 0.1%, according to Acadata.
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Meanwhile, property prices in London will continue to fall in 2019 and 2020, with the sharpest drop, of 4.7%, predicted this year.
Price growth has been almost non-existent in the capital since 2018, with value declines peaking at 4.6% earlier this year, Acadata said.
Under this scenario, sterling’s value against the dollar is expected to rise most significantly, up to around 1.35, according to UBS, a value last seen more than a year ago.
The increase will put a damper on the good value that dollar-based buyers have been getting in the U.K. market and could slow foreign investment in the country.
Scenario 3: A No-Deal Brexit
A no-deal Brexit is considered the most unlikely outcome to emerge at the end of the month, according to UBS, and it would deliver the “greatest uncertainty for what’s around the corner,” Mr. Cook said.
“You’re talking about weaker levels of house price growth, probably a short-term continuation of the current market,” and further downward pressure in London, he added.
But unlike other periods of economic pressure, Brexit “has been sign posted for a very long time,” Mr. Cook said, and measures will be in place to protect the economy.
Interest rates will likely be cut and government plans for spending and measures to stimulate the economy will help mitigate the effects of a no-deal Brexit, he added.
Property prices would be expected to fall around 6% next year in the case of a no-deal Brexit, though declines as high as 10% to 20% are not out of the question if the market reacts more strongly than anticipated, according to KPMG.
The declines will be felt across every region in 2020, with the sharpest falls expected in Northern Ireland, down 7.5%, closely followed by London, down 7%, KPMG said.
A no-deal scenario would be the worst for sterling, with the pound expected to decline to around 1.12 versus the dollar, according to UBS, providing a boon for dollar-based foreign investors.