Brexit Impact on UK Property Market Using the Demand-and-Supply" Model

Part B (45% of the mark for this assignment)

In the run-up to March 2019, various arguments were voiced about changes in the UK housing market as a result of the UK’s possible withdrawal from the European Union (‘Brexit’).

Focusing only on the arguments expressed in Extracts 1–4, use the ‘demand-and-supply’ model to discuss how Brexit – as it was understood at the time of the extracts – may be impacting on the UK property market.

Extract 1 UK house prices fall at fastest rate in six years on the back of Brexit – Rics

The looming threat of Brexit has dragged down the UK property market further, with prices falling at the fastest rate in six years and the outlook for sales the weakest in two decades, according to Britain’s surveyors.

The Royal Institution of Chartered Surveyors (Rics) said the number of inquiries, agreed sales and new instructions all declined in December.

Sales expectations for the next three months were the lowest since the survey began in 1999, with a balance of −28% – the difference between the number of respondents anticipating increases and the number expecting decreases.

Sales expectations were either flat or negative in every region of the UK for the period from January to March, when the UK is scheduled to leave the EU.

Separate government figures showed house prices falling for the third month in a row in November. The data prompted the EY Item Club – an economic forecasting group that bases its work on the Treasury’s economic model – to warn that house prices could fall by up to 5% this year if the UK crashes out of the EU without an agreement. The Item Club said that if the UK leaves with a deal, prices could rise 2% over 2019.

Many surveyors and estate agents interviewed by Rics described the market in December as ‘very quiet’, with the usual dip before Christmas exacerbated by Brexit uncertainty.

David Knights of David Brown and Co in Ipswich said: ‘One of the quietest Decembers for many years, with very few inspections, viewings or sales.’

[...]

The surveyors body also highlighted the lack of supply and affordability, with stock levels and buyer interest declining further in December. Estate agents have an average of 42 properties on their books per branch, close to record lows.

Source: adapted from Kollewe (2019)

Extract 2 UK households have taken a £1500 income hit since the EU referendum

[B]y the end of 2018, real household disposable income was £1500 a year lower than the Office for Budget Responsibility’s pre-referendum [2016] forecast – with over half of this income hit due to higher than forecast inflation

Source: Resolution Foundation (2019)

Extract 3 Materials costs expected to rise as Brexit fuels contractors’ fears of slow growth

Expected rises in material costs along with the increased uncertainty that Brexit presents are fuelling contractors’ fears of a subdued market for the next 12 months, according to the latest UK Market Intelligence report from Turner & Townsend.

The consultancy firm found that contractors expect the cost of construction materials to rise by 5.3% in the next year and that more than half of survey respondents feel the market will cool during that time.

Source: Tute (2018)

Extract 4 Will Brexit cause house prices to crash? Experts give their predictions for the property market

With just four months left until the UK leaves the EU and no certainty over whether it will be in a no-deal scenario or not, what is going to happen to house prices? Is a property crash coming? i asked property and money experts for their predictions.

[...]

Ruban Selvanayagam, co-founder at Property Solvers, said: ‘Whether Brexit will prompt a property crash is too hard to say. Should a no-deal Brexit come to fruition, the pound could tank and fuel inflation.

‘The Bank of England could then be forced to raise interest rates beyond the historical lows we’ve seen since the 2008–09 crash.

‘This could potentially lead to some kind of correction in the property market. But, again, these things are very hard to predict.’

[Property investor] Vicki Wusche added ‘I don’t believe a property crash is coming. Certainly not in the way that it occurred in 2007.

‘This time there is still a danger of panic caused by Brexit but if the other factors are not in play we shouldn’t worry.

[The last major housing crash a decade ago was driven by a shortage of loans combined with an increase in interest rates.]

‘Interest rates are low, the Monetary Policy Committee must manage the need to control inflation with the ability of the UK to trade effectively. But I don’t believe interest rates will reach 5 to 7 per cent in the next three years – and if they do we will have more to worry about than a housing crash.’

Source: adapted from Rodionova (2018)

Student notes for Part B

Part B asks you to use the demand-and-supply model to discuss the changes in the UK housing market described in Extracts 1–4. Please only refer to the arguments that were expressed at the time that these extracts were written, and not any information or developments about Brexit since then.

The main thing is to apply the underlying concepts of demand and supply to the arguments outlined in the extracts. Your answer should distinguish between movements along curves as well as shifts in curves. Extract 1 describes changes in demand-and-supply curves, and Extracts 2–4 contain material that might explain some of the changes covered in Extract 1.

Please note that it is not necessary to draw demand-and-supply curves for your answer, but you may add a diagram if you wish. However, you may also refer to Figure 2 below in your answer.

Figure 2 Demand-and-supply diagram

If you do refer to this diagram please cite it as Figure 2, and outline which curves you are referring to in your essay (supply curves S1 and S2 and/or demand curves D1 and D2). You may also refer if you wish to any figures given in Chapter 6 (for example, Figure 6.6(a) and (b), Figure 6.7(a) and (b), Figure 6.8 or Figure 6.9).

You will find further relevant material for this question in Chapter 6 of Personal Finance (particularly in Sections 2–4 and 7) and the associated online study in Week 17 (e.g. Sections 2, 3, 5 and 6).

You may want to use a quote from the extracts to support your arguments. In that case, please use the ‘cited in’ referencing format that you learned about in Section 7.1 of Week 17. For example, for Extract 1 you would use:

In-text citation: Kollewe (2019) cited in Open University (2019).

Reference list: Open University (2019) ‘TMA 03’ in DB125 You and your money [Online]. Available at [please insert the website address of the page containing TMA 03] (Accessed [please insert the date that you accessed these assessment materials]).