By Conor Lambe, Economist at Danske Bank
Over a year after the EU referendum, Northern Ireland’s housing market has been impacted by the Brexit vote. But not to the extent that some feared. The average house price increased by 5.0 per cent over the year to the first quarter of 2017 and by 4.4 per cent in the second quarter.
Factors such as the housing market still being in a state of recovery, the low interest rate environment, relatively affordable house prices keeping the market accessible to buyers and shortages in the supply of houses for sale have all contributed to rising house prices. However, the squeeze exerted on consumers by rising inflation (a result of the depreciation in sterling that followed the referendum) and uncertainty around Brexit have played a role in slowing the rate of house price growth. The latest numbers are significantly below those for the second quarter of 2016, when annual house price growth was 7.8 per cent.
The above provides some details on the impacts of Brexit to date, and the broad pattern is likely to remain similar in the short-term. But what might leaving the EU mean for the local housing market in the longer-term?
Given the uncertainty around Brexit, forecasting what could happen to house prices over a long period of time would be a difficult task. But it is possible to identify the drivers of the housing market and consider some of the potential implications of a hard Brexit on them.
There are a number of factors that can impact demand and supply in the housing market, such as credit conditions and government policy. But I want to focus on three factors – real earnings, migration and the stock of housing – and how they could be impacted by a hard Brexit, relative to a scenario in which the UK maintains very close links to Europe.
Real earnings are a key factor in determining the demand for housing. Like for most goods, when earnings are higher people are more able, and willing, to buy a house. One of the key drivers of real earnings is productivity growth but the UK’s productivity performance has been weak for around a decade and in Northern Ireland, the need to increase productivity remains a long standing issue.
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.
This article was published in The Belfast Telegraph on 17th October 2017