In a world full of gloomy post-referendum prognostics is there anything for low to middle income households to be cheerful about? In recent research we have shown that rising housing costs have dragged down living standards over the last two decades. Could a Brexit-induced drop in house prices be the silver lining for these hard-pressed households?
It is worth noting at the outset that a house price fall in the wake of the referendum is no sure bet –pre-referendum uncertainty appears to have had little effect on official house price figures released today. While most agree that the high end of the London property market is vulnerable to foreign buyers leaving the field, the outlook for the mainstream domestic market is far from clear. Crucially, demand may fall but supply could too. The possibility of lower returns will reduce the incentive for house builders to meet the government’s (already challenging) target of 200,000 new homes a year, while an exodus of migrant construction workers could put a practical crimp in the nation’s house building plans.
If house prices were to fall, however, surely that would be good news for the low to middle income households (LMIs) we know have struggled with rising housing costs for many years? For the majority of LMIs who own their homes, the answer is probably no. A house price fall would mean a drop in net wealth for all these households and an associated sense of being worse off. And a fall in prices would have little effect on mortgagor households except for those more recent and heavily leveraged owners who could find themselves skirting close to negative equity.
This might not seem to matter, however, to the LMIs, and especially younger people, who do not currently own their homes. At first glance they would look set to be key beneficiaries as lower house prices open up the prospect of ownership or at least lower rents. But as the survey from the Royal Institute of Chartered Surveyors showed last week, post-Brexit uncertainty is likely to damp down action in the housing market in the short to medium term. While this could be partially offset by some buy-to-let landlords divesting as the Bank of England has warned, in the absence of new house building it looks likely that there will be less to buy for some time to come.
Whether LMIs could service the smaller mortgages they would need to take out in the event of a future house price fall is an even more important consideration. As we have shown before, it is not the absolute price of housing that matters but the cost of housing relative to income. The earnings outlook for LMIs was weak pre-Brexit; arguably it is now weaker still. To state the obvious, cheaper houses are of no benefit to households who have less than ever to spend. Ultimately it is clear we cannot rely on the (uncertain) house price effect of Brexit to solve the endemic housing affordability problem we have in the UK.
Instead, a range of active policies is needed now more than ever. Many of the changes we have called for before – from strengthened renters’ rights to improved support for low paid working families – have added pertinence in a post-referendum world. But there is also an opportunity for bolder thinking. With the cost of borrowing at a record low, and a new prime minister acknowledging the “housing deficit” impact on “ordinary people”, is now the time for government to roll up its sleeves and directly commission the many more homes that we all know to be an essential feature of a long-term housing solution?