Brexit-Related Lower House Prices Won’t Make Property Affordable

We asked an economics academic about yesterday's headline on Brexit projections and falling house prices. It doesn't look good.

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18 January 2019, 9:45am

(Photo by Emily Bowler/VICE)

So look, you’ve been half-following the Brexit news for more than two years now, waiting for a definitive statement on the sort of EU split we’ll have, ideally from the leader of the governing party of the UK. Theresa May’s not available to offer that right now, something about trying to hold the Tory party together in a white-knuckle grip while recovering from having her own deal voted down catastrophically in Parliament. And still the Brexit-related news cycle rolls on.

On Thursday morning, BBC News reported that the housing market is the worst it’s been in 20 years, with surveyors seeing house prices fall month-on-month since last autumn. To a person in their twenties with basically nothing in savings and the ring of “millennials just don’t move out of their parent’s houses!” in their ears, that… that almost sounds like something positive. Besides a post-referendum wobble and post-recession nosedive, house prices have basically risen year-on-year in the UK since 2005, with the highest ones in – surprise! – London. At a glance, news of falling prices seems to hint at an opening rung on the property ladder.

But what do I know, I’m not an economist. Instead, I asked Dr Gabriel Ahlfeldt, associate Professor of Urban Economics & Land Development at London School of Economics. First, we spoke about whether or not this was actually a good thing for millennials, and then about what different Brexit scenarios would mean for the housing market. His explanation was not exactly what I, millennial without real estate prospects, was hoping to hear. To simplify (a lot), if you have lots of money ready for this exact scenario: go buy a damn house. If not, you’re even more screwed than before. I’ll let him explain.

VICE: BBC News reported this morning that 19 percent more surveyors believe housing prices will fall in the coming months – so, what could this mean for millennials who've been told for years that property may be out of reach?
Dr Gabriel Ahlfeldt: Economists tend to agree that Brexit would lead to lower GDP growth. House prices reflect, to some extent, an expected growth of housing demand. And that depends on GDP. As such, it is possible that Brexit may lead to a relative decline in house prices (relative to a no-Brexit scenario), and the effects may just have started to become visible. However, if the decrease in house prices just correctly anticipates the negative effect of Brexit on wages and housing demand, housing affordability will not increase for the average millennial.

So… essentially it could be good, but is likely just reflecting that we’ll be both more broke and have lower property prices?
If house prices are falling because markets are anticipating that people in the future will have less money, then I can’t see how this could be something good. If house prices fall because we are building a lot of houses, that means there is just less scarcity of homes, therefore prices fall, that is good. But then, if it just falls because we have no money, that can’t be a good thing.

Brilliant. Based on this, what would be the best Brexit scenario for a millennial hoping to buy a house?
I mean, now that markets are seriously concerned that we may have a hard Brexit, this is the time when a potential home buyer may actually buy a house, in the hope that, in the perfect world, we negotiate some sensible deal that will avoid the worst economic consequences.

Could other aspects of Brexit counteract the lowering prices?
While Brexit may lead to lower house prices, it may also lead to lower incomes, thus not improving housing affordability. If trade costs increase, the cost of many important goods will increase too. As the cost of living rises, it becomes more difficult for the younger generation save money for down payment of the first house.

This is sounding rough. How do raw house prices, demand, and mortgage interest rates interact to create the prime conditions for young people to get on the property ladder?
Property prices and rents are the outcome of the interaction of demand and supply. Lower mortgage rates make mortgages more affordable, but prices tend to increase, thus offsetting the effect. The most direct way of improving housing affordability and helping young people to get on the property ladder is to increase housing supply, which means building more houses. An increase in demand – eg: because wages increase or the population grows – tends to increase house prices more in areas where the number of available houses is limited than in areas where the housing stock expands in response to a growth in demand.

So, a lot of people just see house prices going down and think that’s a good thing – why might they be mistaken?
It’s only good if house prices go down because of expansion and supply. I mean, there is a scarcity of homes, so you remove scarcity, therefore prices go down, this makes us happy. If the only reason prices go down is because we have less money, then it’s just reflecting negative economic circumstances, and that is bad.

Knowing what we can about projected changes after a no-deal Brexit and a softer, Norway-style Brexit, what might the next few years hold for first-time buyers?
Economists tend to agree that the consequences of a no-deal Brexit and a softer Brexit are qualitatively similar, but the consequences of a no-deal Brexit will be much more severe. In any case, incomes are expected to rise more slowly and, as a result, house prices should also increase at a slower rate. For prospective house buyers with significant savings on their bank account, or with wealthy and supportive families, lower prices may represent a chance to get on the property ladder. For the rest, it may just mean that will become more difficult to save up for the first house.

Let's say I wanted to buy a house right now, hop in on the lowering prices before everything else catches up, is that a good idea?
Yes. If you have the money now, and if you expect that there will be no hard Brexit, then now is the time to buy a house, I would say.

So, unless you have a big chunk of cash saved for this exact purpose, nothing will change, and will probably get worse for the average millennial?
That is my fear, because it is driven eventually by negative consequences. Therefore, for the average millennial, they are unfortunately in the situation that will become worse and not better.

We spoke to another academic, to juuust double-check that things might be bad in the future. Professor Christian Hilber, Professor of Economic Geography at LSE, says that “a hard Brexit would not actually be good news for the millennials… not even with a more narrow focus on housing markets.” Apparently, even after the (eventual) economic recovery, the prices will only reflect the damage done. His final message is “if…it comes to another referendum-vote, millennials would be extremely ill-advised to vote for a hard Brexit because the latter would move them even further away from satisfactory housing consumption over their expected lifetime.” Great!! Thanks to them both.

@corissahollenb1