Capital Economics: Housing market meltdown unlikely if UK leaves EU

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A vote for Brexit is unlikely to trigger an outright UK economic and housing market collapse but would still affect them both, according to Capital Economics.

A Capital Economics statement says the outcome of the vote will have “very little bearing on the UK’s medium-term economic performance” and the housing market.

But the firm says: “But it is certainly true that the referendum could persuade some firms and consumers to defer major spending and investment decisions, as well as triggering a more substantial drop in the exchange rate and a rise in the risk premium attached to sterling assets, including property.

“And with housing already looking very expensive, could even a brief rise in uncertainty and volatility tip it over the edge?”

Brexit would hit housebuilding hard though, says Capital Economics.

It says: “With the latest HBF data reporting that 41 per cent and 32 per cent of housebuilders consider labour availability and costs to be constraints on production, a shortage of workers has been holding back housing starts.”

CE says that around 12 per cent of construction workers were born outside the UK and that training a new wave of British workers would take years.

It explains: “Thus, if it compounded existing labour shortages, Brexit could have a lasting, dampening effect on housing starts.

“Altogether, uncertainty in the short term might lead to a small drop in transactions and a slight easing in house price growth. But we think the prospect of Brexit driving a collapse in prices is slim.

“Rather, with prices very high compared to incomes, and being propped up by a shortage of homes for sale, a recession and rising unemployment that drove up the number of forced sellers and cooled buyer demand is probably the biggest risk.”

The economic consultancy also says that some overseas buyers might be tempted to sell sterling ahead of the vote in order to maximise their gains.

But Capital Economics says returns are not the only reason overseas buyers opt for UK property.

The statement says: “They also see London as a safe haven due to its robust legal system, favourable property laws, stable governance and cultural draws.”

Capital Economics notes that most overseas buyers only want to buy in London, meaning Brexit should not affect housing demand.

The agency also says a rise in interest rates is unlikely to hit mortgage affordability.

It says: “With a slump in the pound likely to dampen confidence and with inflation already low, we doubt the MPC would panic and hike rates aggressively. In any case, MMR regulations already require banks to test buyers’ ability to withstand a 3 per cent rate hike.”

Capital Economics says there are few signs a recession is near, and that wages are likely to rise and mirror house price hikes.