Will Brexit cause house prices to fall?

Brexit will have far reaching consequences. One issue close to many of our hearts is that of house prices. This post considers post-Brexit supply and demand for UK housing.

Supply

We currently import ￡14 billion of building materials each year. A weaker Pound will cause the price of these to rise, thus increasing the cost of building houses. This would act to increase house prices.  

Increased uncertainty will mean investors are less willing to take risks by investing in building new houses. This would act to increase house prices. Some house builders have already seen their market value drop as a result.

However, both these effects will only impact house prices in the medium term (it takes time to plan and build new housing). House prices over the next 12 months will unlikely be unaffected by the supply side effects.  

Demand

Short term, immigration is likely to rise as people enter the UK before the borders close. This would act to increase house prices in the next couple of years. Long term, less immigration would act to reduce house prices.

Who's going to buy a house that could be cheaper next month?

Consumer confidence in future house price growth is likely to fall (as uncertainty about the economy increases).  Who's going to buy a house that could be cheaper next month? This would act to reduce house prices.

If the Pound weakens consumers will have less disposable income. This would act to reduce house prices. However, a weaker Pound might increase demand for British housing from foreign investors.

A significantly weaker Pound would put pressure on the Bank of England to raise interest rates, which would act to reduce house prices (mortgages become more expensive). The Bank doesn't have much room for maneuver when it comes to reducing interest rates if it wanted to stimulate spending.

Speculation is a key driver of house prices...

Speculation is a key driver of house prices - people buying houses primarily because they go up in value and can be resold at a profit. Economic uncertainty will increase the risk of investing in British housing which would act to reduce house prices.

However, the desirability of British housing as an asset depends on how other investments perform. International investors weigh up whether British housing generates good returns compared to alternative investments across the globe - the value of housing in Britain depends (to some extent) on the global economy.

Other factors

House prices are more sticky downwards than upwards due to loss aversion. This acts to make house prices stagnate than fall.

The impact of Brexit on house prices won't be equal. House prices in the areas most affected by speculation (South East) will be more likely to fall.

Will Brexit cause house prices to fall?

There are a number of countervailing effects on house prices right now. We don't know which way it will go, but it would be a bold person who gambles on house prices continuing to rise.

Postscript

If we go into full blown recession all bets are off as demand for housing crumbles like a biscuit in blender. Hopefully that won't happen.