Why vot­ing to leave the EU has al­ready hit NI’S hous­ing mar­ket... and worse may yet be to come

Belfast Telegraph - Business Telegraph - - News - By conor lambe, Danske bank econ­o­mist @conor­lambe In next week’s Econ­omy Watch, we hear from EY Ire­land chief econ­o­mist Neil Gib­son

One year on and North­ern Ire­land’s hous­ing mar­ket has been im­pacted by the Brexit vote — but not to the ex­tent that some feared. The av­er­age house price in­creased by 5.0% over the year to the first quar­ter of 2017 and by 4.4% in the sec­ond quar­ter.

Fac­tors such as the hous­ing mar­ket still be­ing in a state of re­cov­ery, the low in­ter­est rate en­vi­ron­ment, rel­a­tively af­ford­able house prices keep­ing the mar­ket ac­ces­si­ble to buy­ers and short­ages in sup­ply have all con­trib­uted to ris­ing house prices. How­ever, the squeeze ex­erted on con­sumers by ris­ing in­fla­tion (a re­sult of the de­pre­ci­a­tion in ster­ling) and un­cer­tainty around Brexit have played a role in slow­ing the rate of house price growth. The lat­est num­bers are sig­nif­i­cantly be­low those for the sec­ond quar­ter of 2016, when an­nual house price growth was 7.8%.

The above pro­vides some de­tails on the im­pacts of Brexit to date and the broad pat­tern is likely to re­main sim­i­lar in the short­term. But what might leav­ing the EU mean in the longer-term?

Given the un­cer­tainty around Brexit, fore­cast­ing what could hap­pen to house prices over a long pe­riod of time would be a dif­fi­cult task. But it is pos­si­ble to iden­tify the driv­ers of the hous­ing mar­ket and con­sider some of the po­ten­tial im­pli­ca­tions of a hard Brexit.

There are a num­ber of fac­tors that can im­pact de­mand and sup- ply in the hous­ing mar­ket, such as credit con­di­tions and gov­ern­ment pol­icy. But I want to fo­cus on three fac­tors — real earn­ings, mi­gra­tion and the stock of hous­ing — and how they could be im­pacted by a hard Brexit, rel­a­tive to a sce­nario in which the UK main­tains very close links to Europe.

Real earn­ings are a key fac­tor in de­ter­min­ing the de­mand for hous­ing. When earn­ings are higher peo­ple are more able, and will­ing, to buy a house. One of the key driv­ers of real earn­ings is pro­duc­tiv­ity growth but the UK’S pro­duc­tiv­ity per­for­mance has been weak for around a decade and in NI, the need to in­crease pro­duc­tiv­ity re­mains a long-stand­ing is­sue.

A hard Brexit rep­re­sents a sig­nif­i­cant risk to trade and in­ward for­eign di­rect in­vest­ment (FDI) in NI and the rest of the UK. Hav­ing a sig­nif­i­cant num­ber of busi­nesses with global links, ei­ther through the mar­kets they sell into or where they orig­i­nate from, tends to be ben­e­fi­cial for pro­duc­tiv­ity lev­els. So if trade and FDI are ad­versely im­pacted by a hard Brexit, there would likely be knock-on, neg­a­tive im­pacts on pro­duc­tiv­ity and real earn­ings, which could lead to more muted de­mand for hous­ing.

The num­ber of peo­ple in a coun­try is another de­ter­mi­nant of hous­ing de­mand. The UK Gov­ern­ment is yet to make clear what mi­gra­tion pol­icy will look like af­ter Brexit. But it is widely ac­cepted that a hard Brexit would mean rel­a­tively strict con­trols on im­mi­gra­tion lev­els, whereas a soft Brexit would still fa­cil­i­tate rel­a­tively easy move­ment into the UK for EU work­ers, though not to the same ex­tent as un­der the cur­rent free move­ment of labour rules.

In the event of a hard Brexit, it is likely new con­trols would lead to lower net mi­gra­tion than un­der a soft Brexit. Rel­a­tively fewer peo­ple com­ing to NI to live and work would mean less over­all de­mand for hous­ing, com­pared to a sce­nario in which EU work­ers would be able to move to the UK with only min­i­mal re­stric­tions.

Mi­gra­tion pol­icy could also have an im­pact on the stock of hous­ing. The loss of EU work­ers could lead to some pres­sures for con­struc­tion busi­nesses through skills short­ages (al­ready an is­sue) and per­haps through higher costs if they have to pay more to re­cruit and train lo­cal work­ers. When cou­pled with the po­ten­tial for tar­iffs on some con­struc­tion ma­te­ri­als, there could be im­pli­ca­tions for the fu­ture cost of con­struct­ing houses and, po­ten­tially, the num­ber of new houses be­ing built.

There is still con­sid­er­able un­cer­tainty around Brexit and, un­for­tu­nately, a no deal or hard Brexit sce­nario can’t be ruled out, par­tic­u­larly given the lack of progress made dur­ing ne­go­ti­a­tions. There­fore, some of the im­pli­ca­tions out­lined above could end up be­com­ing re­al­ity. In prac­tice, it is not yet pos­si­ble to say ex­actly how the above fac­tors will in­ter­act to af­fect the over­all de­mand, sup­ply and price of houses in the long-term.

But, what is clear is that for a num­ber of rea­sons, of which hous­ing mar­ket im­pacts are only one, there would be con­sid­er­able ben­e­fits from mak­ing quick progress on securing a Brexit tran­si­tion pe­riod, and ul­ti­mately, on agree­ing a deal to main­tain very close links be­tween the UK and EU once the Brexit process reaches its con­clu­sion.

Conor Lambe ar­gues that the vote to leave the EU has af­fected our hous­ing mar­ket

Newspapers in English

Newspapers from UK

© PressReader. All rights reserved.