An unequal market: Brexit, coronavirus, and the economic crash buffet Britain’s housing market

Even as the EU’s chief Brexit negotiator Michel Barnier stressed the bloc’s willingness to compromise to reach a deal with London, Boris Johnson’s earlier insistence on letting his country crash out of the EU still seems like the most probable option.

If Johnson sticks to his words, the decision will sow chaos through the delicate supply chains that stretch across Britain, the EU and beyond, just as the economic hit from the COVID-19 pandemic worsens.

With the end of the year quickly approaching, the British government has shown little interest in reaching a deal, apparently favouring a so-called ”Australian deal” instead, which would see the UK trade with other European countries on World Trade Organization terms. This would mean increased tariffs on almost all imported goods and significant price hikes for the ordinary consumer, as well as uncertainty regarding the pound.

These adverse effects are more than likely to extend to a crucially important segment of the British economy – the housing sector. The uncertainty surrounding Brexit was taking its toll on British real estate even before the onset of Covid-19 and the most recent economic crisis, especially in London, where property transactions slumped by 20% in 2018 compared to a year earlier and average property values fell £11,000.

Mortgages account for around 50% of the banking system’s sterling assets, making the housing market a sector the government can hardly afford to upset further. And yet, already on thin ice, the brittle UK housing market is likely to be further weighed down by the rocky aftermath of a no-deal Brexit, not to mention the pervasive uncertainty for current and potential homebuyers that the global pandemic will continue to drive.

An unequal market

While the press reports the housing sector “remains buoyant”, the Covid crisis means the restrictions that effectively shut down the market in the spring could well be in the offing again this winter. The UK property market was already highly unequal before the pandemic, and the realities of the flurry of activity in real estate immediately after the lockdown’s end can hardly be taken as signs of healthy conditions.

Even before the pandemic, the rates of home ownership among under-35s had fallen precipitously over the past two decades. Thanks to Covid, first-time buyers and renters are in a worse state than ever, due to banks like HSBC pulling mortgage offers for first-time buyers; 90% and 95% mortgages have almost entirely disappeared.

As with most crises, the hardest hit are those at the bottom, who now find themselves in a position where they have to double or even triple the amount of money they put up as a deposit on a new mortgage. Furthermore, thousands of people who were in the process of buying a house earlier this year have lost their exchange deposits, due to the market shutdown taking place after contracts had been exchanged. A third of homebuyers who were mid-transaction when the lockdown began will never recoup those deposits.

Renters and buyers left out in the cold

All these factors are combining to form a veritable housing crisis that doesn’t only affect those looking to buy a new home, but also those who are renting. If anything, the effects on tenants are even more immediately visible. The lockdown has pushed rents to record highs, which, when combined with an unprecedented loss of jobs, has resulted in a quarter of tenants struggling to afford their rents – and 18 to 34 year olds are the most severely affected.

There are now genuine fears that a housing crisis left to spiral out of control can become something more akin to a humanitarian disaster, as thousands of people risk of losing their homes or life earnings in the process. The impact of a surge in homelessness could far outlast the factors that caused it, with individual and household economic stability still upended long after a vaccine for coronavirus is distributed and the stock markets recover.

Missing the point

The urgency isn’t lost on the government, even if its responses have been sluggish and insufficient. The first wave of the pandemic saw the government introduce a range of housing support measures, including a raise of the local housing allowance. Subsequent analysis published in the recent Housing Review, however, showed the well-intended move was less than effective. The increased allowance rates failed to cover three in every 10 homes in a given area, “leaving many without adequate support to cover their actual rent.”

In laying out his plan for a post-Covid Britain, PM Boris Johnson promised to radically boost housebuilding by overhauling the country’s “inadequate planning system,” and vowed to “help get more 20 to 30-year-olds on the housing ladder by offering fixed-rate mortgages available to those with just 5% deposits.” Intervening in the mortgage market is low-hanging fruit for the government, mostly because it’s the cheapest solution, but incentivizing fixed-rates is hardly a guarantee that banks will bring back 95% mortgages.

Even the stamp duty holiday rolled out by Chancellor Rishi Sunak was panned for failing young and first-time buyers, given many of them typically don’t acquire property expensive enough to be subject to the tax. The tax holiday doesn’t apply to purchases before its implementation in July either, leaving those with transactions disrupted by the crisis with deep holes in their pockets.

Britain’s centennial failure

When Parliament passed the Housing and Town Planning Act In 1919, it created a comprehensive, nationwide system of public housing provision for the first time. It came as a response to a decades-long housing deadlock caused by the rapid urbanization of the late 19th century. Today, the causes of the crisis are different, but the problems have remained essentially the same.

The duelling impacts of Brexit, coronavirus, and the global economic meltdown are creating a perfect storm of instability for the UK, and the housing market could bear the scars of the current turbulence for years. The country is already being asked to withstand a health crisis, a financial crisis, and a political crisis at the same time; only the government can ensure a fourth crisis in housing doesn’t add to the pile.

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