Why you shouldn’t wish for Brexit house prices crash

Cast your mind, just for a moment, back to the EU referendum. Apocalyptic warnings and overblown promises were hurled around by both sides.

A Brexit-led house prices cash has been forewarned. Picture: PA Photo/JupiterImages Corporation

The ‘£350 million a week back for the NHS’ promise being perhaps the most infamous.

But there was another warning, one that struck a nerve in almost everyone living in this country because it spoke to our shared national anxiety: house prices.

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House prices will fall after Brexit because of an “economic shock”, then-Chancellor George Osborne warned in an attempt to secure the Remain vote.

He was joined in unison by the Governor of the Bank of England, Mark Carney, who cautioned Brexit could have “material economic effects” and could cause a recession.

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As we stand on the cusp of Brexit now, their warnings echo louder than ever.

So far this year, up to 25 per cent has been wiped off house prices in some of the UK’s wealthiest areas.

Prices have fallen for the fifth month in a row and sales face their worst outlook for 20 years.

The Royal Institute of Chartered Surveyors has said these problems are happening off the back of Brexit uncertainty.

There is nothing that strikes more fear into the heart of a British homeowner than the idea of negative equity caused by a housing crash.

It threatens the British Dream of buying a home, making a mint on it, flipping it, buying more and (if you’re lucky) renting them out to people who have less money than you.

Unless, of course, you’re a young person or one of the millions of households who hasn’t been able to get on the housing ladder because house prices have been so wildly unaffordable in relation to wages for the last decade in many parts of the country, in which case a house price crash probably seems pretty appealing right now.

Home ownership amongst young adults has “collapsed”.

According to the Institute for Fiscal Studies, the chances of owning a home in the UK has halved over the last 20 years, even for young adults on middle incomes.

Before Brexit was officially on the table, the ratings agency Moody’s said first-time homebuyers would benefit from a vote to leave the EU because a fall in house prices would make it more affordable for people trying to get on the property ladder.

The Bank of England has been stress-testing for the worst-case Brexit scenario.

Their stress testing has included a 30 per cent house price drop.

As I scrolled mindlessly through Twitter and Instagram on the bus home after work, I noticed several of my millennial friends had read the news and were excitedly willing this to happen.

“Bring it on,” one said. “I’ll take a Brexit mansion,” said the other.

Anyone who has rented unaffordable, sub-standard accommodation throughout their 20s, had their rent put up by a landlord beyond what they can afford, been charged letting fees by unscrupulous letting agents and watched their monthly income pouring into a landlord’s pocket has had enough.

The allure of a house price crash is understandable, but it wouldn’t quite be the democratic realignment of our wildly hot housing market – especially in London, where the market for homes over £1 million hit an all-time high in June 2018 that these people think.

But it’s not only wealthy areas where house prices could take a hit.

If the market did crash, it would hurt those who have the least the most.

As Neal Hudson, a UK housing market analyst, explains: “It would most likely affect recent first-time buyers with high loan-to-value mortgages, particularly those outside London – recent London first-time buyers need a big deposit so, on average, have lower loan-to-value ratios.”

Another group that could be affected is Help-to-Buy equity loan buyers, according to Mr Hudson.

The Help-to-Buy problem is potentially particularly acute here.

While it’s true these government equity loans protect buyers if the value of the house falls, it’s become increasingly clear that some developers who have used this scheme have inflated prices artificially on the homes they’ve built.

Anecdotally, I’ve heard reports of developers refusing to budge on asking prices even after multiple banks have down-valued them and refused to offer mortgages.

Reports of down valuations – where surveyors say a property isn’t worth the asking price in their report to a mortgage lender – are appearing all over the country.

According to Emoov, one in five of their sales now results in a down valuation while two years ago it was only one in 20.

Property prices are subjective and, it goes without saying that estate agents and sellers will always want the maximum they can get.

In the event of a crash, it’s young first-time buyers and overstretched people who would risk facing negative equity, trapped in homes worth less than the loans they took out to buy them.

People who have managed to scrape together deposits to get on the property ladder would suffer, while older people who have accrued equity over time or wealthier people who bought outright would be insulated from a price drop.

Mr Hudson adds that if there were a house price crash the effects would really be felt further down the line.

“The problems for recent buyers with low equity would start when they need to move,” he explains.

You might think of housing inequality purely in generational terms. That’s how it’s always cast by the media – an us versus them narrative of a war over assets waged between young and old.

However, this is as much an issue of wealth and location. It is not only wealthy areas where house prices could take a hit.

Computershare Loan Services, the UK’s largest third-party mortgage servicer, has warned that the risk of negative equity is particularly high in the North of England (6.79 per cent) if house prices fall, closely followed by Northern Ireland (6.18 per cent), Wales (6.12 per cent) and Yorkshire & Humber (5.14 per cent).

We know the Bank of England are testing for this, but is the Government?

Let’s hope so, because if you think that a housing market crash wouldn’t happen in the context of other economic problems, think again.

It would likely come alongside job losses and rising interest rates, which Mr Hudson says could lead to “forced sales meaning that people could lose a lot, depending on the price falls and their initial loan-to-value ratio, or in a in a few years’ time when they need to move for a job or more space to start a family”.

Those affected could become mortgage prisoners, able to afford their current mortgage, but never able to move because they can’t accrue the equity upsize.

Housing experts often use temperature metaphors to describe the market – hot, overheated, boiling.

In recent years, in many places across the country what we’ve been seeing is something like last summer’s heatwave on repeat.

The housing market has been scalding but a crash, far from cooling things down, could mean some people are badly burned.

‘In that scenario, houses might be cheaper but because it would be more difficult to borrow money homes wouldn’t actually be more affordable’.

There’s an irony here too. A fall in prices could hurt those who are willing it to happen.

Henry Pryor, property expert and analyst, explains that this is also about “the cost and availability of credit”.

In the event of an economic crash or a worst-case scenario Brexit, he warns: “Mortgage finance could get harder to get hold of and/or interest rates could go up, which would mean that people couldn’t borrow as much.

In that scenario, houses might be cheaper but because it would be more difficult to borrow money, homes wouldn’t actually be more affordable.”

However, Mr Pryor stresses the Bank of England “is preparing just in case” and not forecasting a crash on this scale.

Mr Pryor doesn’t expect we’ll see one despite the apparent slowing down of the market right now.

Britain’s housing market is broken.

There can be no doubt about that. Housing has become unaffordable and too many people are caught in the private rental sector and locked out of homeownership.

You can’t blame anyone who is at the sharp end of that for being excited about the prospect of a price crash or, even, seeing it as just desserts for anyone who has pompously told Generation Rent they would be able to buy a house if only they stopped eating avocados/going for brunch/having a life and started working harder or took on another side hustle.

The warnings from Osborne about a Brexit house price crash back in 2015 were a huge miscalculation that only someone coming from privilege could have made.

People who couldn’t buy homes or paid extortionate rents weren’t going heed his advice and vote against that, they were going to welcome it.

The Chancellor who brought in Help-to-Buy saw his chickens come home to roost on that one.

Our society has a duty to sort housing inequality out urgently and our politicians should take note.

‘Far from redressing the balance of housing inequality in Britain, a price crash could further entrench it.

As ever in Britain, the less you have, the more you have to lose’ If we learned anything from the EU Referendum it’s this: beware simple solutions to complex problems.

Lower house prices might sound good but, on closer inspection, you realise that isn’t necessarily the case and, ironically, they might only benefit those who are rich enough to buy homes outright, mortgage free and make a profit from renting them outright to people who can’t afford to do the same.

Our housing market it more complicated than that.

Far from redressing the balance of housing inequality in Britain, a price crash could further entrench it.

As ever in Britain, the less you have, the more you have to lose.