Some might characterise the serving of article 50 as a bit of Russian Roulette – when the trigger is pulled everything could be absolutely fine – but it could also be a bit messy. The point is we won’t know until negotiations start and deals begin to be struck. But that seems a very extreme version of events, particularly for the housing market.
In housing market terms pulling the Brexit trigger won’t lead to any change in the short term – most demand is domestically driven and international buyers are still benefiting from a weaker Sterling which gives them a discount to compensate for any risk they might perceive. Indeed the expectation by the Chancellor pre-referendum that house prices would collapse by up to 18% over the next two years, now seem very wide of the mark.
House prices are still rising across the UK and continue to grow in London which is arguably more sensitive to Brexit. But over the medium term it’s the effect of the outcome of negotiations on the UKs economic performance – particularly jobs that will determine the effect on housing market prices and activity.
In the worst case scenario, the markets will lose confidence in the UKs ability to thrive outside of the EU, especially if high tariffs barriers are imposed. That could lead to a further fall in Sterling. While that should help to boost exports, it is not so nice for most households who will see living standards squeezed due to resultant higher prices.
If markets lose faith in the UK economy it will be more difficult for the government to raise funds by selling gilts in the market. The result is higher interest rates. That would help to lift the currency and cause a reversal of some of the inflationary effects, but if markets and investors continue to lack faith in the UK’s potential there’s less to be happy about.
Interest rates and the labour market are the most important drivers of the housing market’s fortunes, so if uncertainty affects investment in jobs and interest rates increase, household will be hit hard and the likelihood of increased forced sales and falling house prices.
That is a worst case scenario though. If the economy is in the doldrums it’s unlikely that the BoE would consider an early rise in rates – that would be unsettling and could crush households and businesses at just the time we need them to spend and invest. The Bank has already stated that it’s minded to look through inflation being above its target at least in the short term.
And investors may be willing to take a longer term view about the UKs performance. While in the short term there may be uncomfortable adjustments to new trade deals, in the medium to longer term the UK could become a less regulated and hence a more flexible economy able to respond more swiftly to changing conditions. That would give it an advantage and help to boost potential growth.
Nobody knows what the outcome of negotiations will be, but it seems most likely that in the short term uncertainty and the transition costs of leaving the EU will dampen the pace of the UKs economic growth and cause some wobbles in the financial markets. But in the medium to long term, the economy will find its way. While the economy may ultimately be smaller than it would have been had the UK remained in the EU, that does not mean that it will fall into recession. Nor that the UK, currently the fourth largest economy in the G7 will suddenly fall to the lower ranks.