The fallout from the unexpected Brexit vote is poised to destabilize the U.K.’s real estate market.
Over the next 18 months, the number of homes changing hands is set to tumble by tens of thousands while prices remain stagnant as would-be buyers sit on their hands, according to real estate consultancy Savills' five-year-forecast of the market released Thursday.
Sales are expected to slide by a fifth to as low as 1.04 million in 2018 as buyers will be reluctant to stretch their borrowing as they watch the Brexit negotiations unfold, the report said.
As a result of weakening demand, the average cost of a home in the U.K. is forecast to remain flat over the next 12 to 18 months, growing just 2% by the end of 2018. Savills believes, however, that a period of super low interest rates, currently 0.25%, should prevent hefty price falls from occurring across the U.K.
In London, where many had feared a housing bubble was developing over the past couple of years, thanks to double-digit inflation of house prices, growth will also remain flat next year.
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"Negotiations to leave the E.U. are expected to take two years, during which time buyer sentiment will remain fragile," said Lucian Cook, head of residential research at Savills, in a statement.
"Interest rates are now forecast to stay low for longer, which will prevent a market correction. At the same time, buyers will be reluctant or unable to stretch their borrowing, leaving little or no capacity for house price growth depending on location."
Signs of recovery toward the end of the five-year forecast period?
According to Savills' report, both prices and sales should pick up toward the end of the forecast period, with the average cost of a home in the U.K. rising 13% over five years and sales reaching 1.24 million.
As for prime central London, where demand was severely impacted even before the Brexit vote by a double whammy of tax hikes for more expensive homes, prices are set to bounce back at a faster pace, rising by 21% over the five-year forecast period.
Savills has predicted that while prices will fall by 9% this year and remain flat for the following two years, this will be offset by growth of 8%, 5% and 6.5% respectively in the following three years as the uncertainty clears. This segment of the market is expected to bounce back quicker as it is less reliant on mortgage debt thanks to cash-rich buyers.
"If the U.K.’s prime housing markets were compared to an ailing patient, we would probably say they have been afflicted by a bad case of overexposure to taxation complicated by Brexit-induced malaise," Mr. Cook said.
"To pursue the analogy, there may be a little more pain to come. But after a reasonable period of recuperation as the UK negotiates to leave the EU, we fully expect their health to be restored."
However, their research was carried out on the assumption that negotiations would take two years and before it emerged earlier today that the British government cannot begin the Brexit process without approval from Parliament after an unexpected High Court ruling. The government is appealing the decision.
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Rental price growth to outpace sales
The report also found that as first-and second-timer buyers struggle to access or trade up the market, demand for rental properties will increase. This means that rental growth will be stronger than house price growth both in the short term and over the five-year forecast period.
Average rents are forecast to rise by 19% across the U.K., and 24.5% in London, where access to home ownership is most difficult.
Price Growth Over the Next Five Years:
| Mainstream U.K. | Mainstream London | Prime central London | |
|---|---|---|---|
| 2017 | 0% | 0% | 0% |
| 2018 | 2% | 3% | 0% |
| 2019 | 5.5% | 4.5% | 8% |
| 2020 | 3% | 2% | 5% |
| 2021 | 2% | 1% | 6.5% |
Source: Savills