Is Brexit the start of a lost decade for house prices?

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The full impact of Brexit will take many years to emerge, but the house price growth which many people in the UK have become accustomed to now seems to be at an end. That's because uncertainty is likely to be exceptionally high for a number of years and this looks set to cause foreign and domestic buyers to hold off on buying UK property.

In the short term, the UK needs to put in place a new Prime Minister. This process is likely to take at least three months, as the Conservative party elects a new leader at their party conference -- who may (or may not) then go on to call a General Election. Alongside this is uncertainty regarding the future of Scotland and to a lesser extent, Northern Ireland. Although the breakup of the UK may be unlikely, the mere possibility of it is likely to cause potential house-buyers to be put off.

A lengthy divorce

Once a new Prime Minister is in place, he or she must negotiate with the EU on the terms of the UK's "divorce". This will be a lengthy process and could see both sides play hardball with one another, thereby further increasing the uncertainty. Then, once the UK has left the EU, there will be another period of uncertainty as the UK goes it alone for the first time in over 40 years.

With the UK having been seen as stable from an economic and political standpoint, Brexit will create a fundamental shift in how foreign investors view the country. This is likely to mean reduced demand for London property, in particular, even though a weaker pound makes it more appealing from a currency perspective. As a result, overall demand for UK property may fall considerably in the coming years.

Furthermore, there is a good chance of rising interest rates. That's because a weaker currency makes any economy more competitive due to its positive effect on exports. This could give the UK economy a boost and mean that rock-bottom interest rates are no longer necessary. And with the cost of imports rising due to a weaker currency, inflation may increase and mean that an interest rate hike is required to an even greater extent. Higher interest rates will mean that houses are even less affordable than is currently the case due to higher borrowing costs.

The only way is down

Of course, house prices have been unaffordable for many people for a number of years. The house-price-to-average-earnings ratio stands at its highest level since the start of the credit crunch, which indicates that a fall is on the cards, even without the effects of Brexit. And if prices do start to fall then many people are likely to wait for even lower prices, with it becoming a snowball effect which could take place at a faster pace than many investors are currently anticipating.

So, while house prices have performed well in the last 25 years or so, they now look set to endure a lost decade. Combined with the negative effects of higher stamp duty on second homes and the lack of higher rate mortgage relief, there seems to be little reason for them to go anywhere but down.

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10 property hotspots

In Scotland, Edinburgh is seen as a city with huge growth potential. In 2014, prices in Edinburgh were up 10% in a post referendum boom that shows little sign of slowing down.

Local agents are not expecting quite such stellar growth for the next 12 months, but they think price rises will be well above the average predicted for the whole country.

Rightmove named this as the area where it expects house prices to grow the most over the next five years. It says that over this period there will be a huge number of people moving out of London in order to afford to get onto the property ladder. They want a reasonable commute combined with plenty of attractions in the local area, and Southampton offers all this. With relatively affordable housing stock, it's a prime candidate for growth.

Luton was Rightmove's candidate for the second biggest house price rises over the next five years. It emphasised that this isn't a mater of opinion, it is the result of crunching the data.

Luton is another major beneficiary of the move out of London, and while it is arguably not as attractive a place to live as Southampton, it's only 23 minutes into central London - which rivals some of inner London's commuter times. With average prices of £179,368, it's clearly a far more affordable option, and the area has already started to show signs of a boom.

This was the third area suggested by Rightmove. As with Southampton, it is well positioned for London commuters, and also has huge local attractions.

A survey last year asked young professionals to name the place they would most like to live, and Brighton and Hove were the only areas that appeared on the list outside London.

One of the reasons it's not higher up the list is that houses are already on the pricey side, with an average cost of £338,956 - up 13% in the past year alone.

There may be few people who grow up with the dream of living in Swindon, but the electrification of the rail line to London will bring travel times down across the West Country, so Swindon becomes part of the outer commuter area.

Given that the average property costs £168, 968, it's easy to see why Swindon will be a popular option for commuters on a tight budget.

Bath is also going to benefit from electrification of the line, because the commute to London will fall to a manageable 70 minutes. The beauty of the city - along with a vibrant social and cultural life - makes it a clear choice for more long-distance commuters.

Of course, with an average asking price of £374,617, it's not a tremendously cheap place to buy, but the geography of the city restricts development, so these prices are expected to rise still further.

Property Frontiers says that the booming house prices in Oxford are set to get even higher. At the moment, travel to London takes 60 minutes, but this will reduce even further in 2016 when the line is electrified. Prices in the most desirable parts of the centre aren't much cheaper than London.

However, further out there are pockets of affordability, and when the Water Eaton station opens in 2015 it will open up areas to the north of the city too.

Manchester has seen enormous property price rises over the last couple of years, and Property Frontiers expects this to continue into 2015.

Other commentators are expecting the growth to slow over the next few years, especially given the gains made since 2012. However, demand for properties remains buoyant, and with the growth of the local economy, price rises seem inevitable.

Rising prices in London have pushed buyers further and further out of the centre, so estate agents are now claiming zone three as 'the new zone 2'.

Savills believes that the biggest gains over the next five years will be the less glamorous districts - putting the South and East in the frame. Gritty areas that could benefit include Ladywell, Streatham and Catford in the south, and Leytonstone, Forest Gate and Walthamstow in the east.

Cambridge could also perform well. It has already had house prices lifted by the growth of tech companies to the north of the city, and the arrival of pharmaceutical headquarters will help push prices up further.

In 2016 a new rail service from the city to the science park will keep prices rising, and beyond the opportunities presented by the local economy, Cambridge is also part of the 'outer commute' area of London, which Savills expects to shoot up in value over the next five years.


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