By Conor Lambe, Economist at Danske Bank
A hard Brexit represents a significant risk to trade and inward foreign direct investment (FDI) in Northern Ireland and throughout 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 that new immigration controls would lead to lower net migration than under a soft Brexit. Relatively fewer people coming to Northern Ireland 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 (which are 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 the negotiations so far. 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 Northern Ireland 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.
Some consumers also cited rising house prices, while a small number of people mentioned the resilience of the local labour market as key factors making them feel more confident. But around a third of respondents said they didn’t know what was having the largest positive impact on their confidence levels.
Perhaps unsurprisingly, some people cited Brexit as something making them feel better, while others said it was making them feel worse. To be more precise, twelve per cent of all the people we surveyed said that the UK Government’s longer-term Brexit objectives had the largest positive impact on their confidence levels, while seven per cent felt the same way about the progress made during the Brexit negotiations in recent months.
But on the other side of this, nine percent of those surveyed stated that the Government’s longer-term objectives linked to leaving the EU had the largest negative impact on their confidence levels, while ten per cent felt less confident due to the progress of the Brexit negotiations over the last few months.
Given that confidence fell in the third quarter of the year, it would appear that the reasons for consumers feeling pessimistic are outweighing the reasons for optimism. As well as Brexit, there are a number of other factors having negative implications for consumer sentiment. For some people, it is global risks such as the relationship between the western world and North Korea, terrorism and cybercrime.
For a larger number of people, it’s the impact that high inflation is having on their household finances. But the standout reason that people cited as having the largest negative impact on confidence was political uncertainty and the lack of a Northern Ireland Executive. Thirty-six per cent of the people we surveyed selected this response – a point which serves to reinforce the need to see the return of the Executive as soon as possible.
Earlier this month, when we published the latest Danske Bank Northern Ireland Quarterly Sectoral Forecasts report, we projected a slowdown in economic growth in Northern Ireland. Given the extent to which consumer spending drives the local economy, this fall in confidence reinforces that view.