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Reapit, the leading software platform for estate agents, recently released data showing that the number of property exchanges recorded between November 2018 and January 2019 was down 36% on the average for the same three-month period over the previous five years. This provides statistical support to an intuition that many property experts have had for a while – namely, that the uncertainty surrounding Brexit is having a debilitating impact on the British housing market. Despite this finding, however, average house prices in the UK increased by 2.5% in the year leading up to December 2018. In fairness, this figure is as low as it has been for any twelve-month period since 2013 – but it hardly provides evidence for the apocalyptic catastrophe many critics had predicted.
This data seems to leave us with something of a paradox: how is it that prices continue to rise while market activity plummets? Does it not stand to reason that the further demand for housing falls, the further average prices fall also? Yes, it does – or, it would, if the uncertainty surrounding Brexit had not also leveled a blow to the supply side of the market. Not only are prospective buyers retreating from the market until Brexit is resolved, but so too are prospective sellers. And this fall in supply is why prices have remained stable: because the ratio of buyers to sellers has remained almost perfectly balanced.
Supply and Demand
There are no laws in economics as enduring – or as powerfully predictive – as those of supply and demand. If demand for a good rises, the price of that good rises too. If the supply of a good rises, the price of that good falls. Granted, there are myriad factors involved in the price determination of a commodity as complex as that of property, but if we keep our eye on the factors affecting supply and demand, we can usually generate a reasonably accurate prognosis.
So, let’s begin our analysis by looking at the factors affecting demand. Real wage growth is finally rising at a faster pace than house prices. This means that houses are becoming more affordable; and when houses become more affordable, demand for them rises. Employment levels are at a historic high. The smaller the population of unemployed, the smaller the portion of the population that is excluded from the housing market. Mortgages are just about as competitive as they’ve ever been for small deposit borrowers, allowing first-time buyers who had previously been denied access to the property market to make their first tentative steps onto the housing ladder. And then on top of all of this, the size of the population is forecast to continue rising, and the size of the average household is set to continue falling. As all of this shows, there’s no good reason for demand for housing to fall in the long run. If a fall in house prices is going to come, therefore, it is going to originate elsewhere.
If we now turn our attention to housing supply, the only real concern we’re likely to encounter is that there won’t be enough of it. As anyone who has been paying any attention to property news over the past few years will know, the UK is currently facing a housing shortage. This shortage is exerting constant upward pressure on the price of housing. Government initiatives of various kinds have been implemented in an attempt to equalise the number of houses supplied in the UK with the number of houses demanded; but despite such efforts, demand for housing continues to outstrip supply, with the government once again missing its annual target for net housing stock increase. This is one of the many reasons why house prices have continued to rise so rapidly over recent years – 225% in the last twenty years – and this is why house price growth will probably remain steady throughout the tumultuous months of uncertainty that lay ahead us.
Trust the Trend
In September of last year, the Bank of England released a report in which it stated that a 33% fall in house prices could occur in the event of a worst-case scenario no-deal Brexit. This figure evoked widespread fear across the country – as well as a small amount of glee amongst those looking to take their first step onto the property ladder. But how realistic is this estimate? Is this an absolute worst-case scenario, an outcome that could only conceivably materialise if everything that could possibly go wrong, did? Or is it an outcome that exists within the realm of possibility, a contingency well worth preparing for?
One way to answer this question is to look at the available housing data from the last forty years. How has the market historically responded to shocks? Do crashes leave scars, or are they wiped away and forgotten in time? When looking at the above graph, the answer to these questions becomes immediately and glaringly apparent: no matter the depths of the recession, no matter the heights of the boom, no matter the seismic magnitude of the shock, in the long run, house price growth always returns to the trend rate. With no exceptions. This lays waste to the prediction presented by the Bank of England.
Now, of course, it is technically possible, despite everything that’s been said, that our present circumstances are so unique as to defy all trends. Perhaps the path we’ve wandered onto will lead us somewhere we’ve never been before, to a time and place at which the laws of cause and effect loosen their tyrannical hold on reality – but the odds of this happening are vanishingly small. The more probable outcome is that house prices will stutter and sputter for a little while, and then they’ll recover and we’ll be back in exactly the same position we would have been in had Brexit never happened.
