The U.K. economy is heavily dictated by housing, with prices reflecting consumer confidence
LONDON—For investors trying to gauge Brexit’s impact on the U.K. economy, the housing market may be the most important bellwether.
Most analysts believe the vote to leave the European Union will drive the British economy to either flatline or fall into a recession this year. But property prices could determine whether this will be a temporary dip or prolonged slump.
Few developed economies are as influenced by housing as Britain, where prices dictate consumer confidence after decades of steep gains. In the past 30 years, households in the U.K. have cut spending every time that house prices have fallen.
So economists are paying particular attention to property prices.
“Housing market activity and prices now look to be at very serious risk of an extended, marked downturn,” said Howard Archer, economist at IHS Global Insight.
Overall, economic indicators have given a mainly negative reading of Brexit’s effect on the U.K. economy. On Monday, the latest business survey from data firm IHS Markit showed that economic activity in the manufacturing sector is contracting at its fastest pace in three years.
The housing market held its ground in July, according to British lender Nationwide Building Society. But impact from the June 23 vote may take longer to feed through, analysts say. Polls of property appraisers suggest buyer interest was falling even before the vote.
In pockets, prices are already heading lower. House prices in central London were down 0.6% in June from a year earlier, according to data from property broker Knight Frank.
Marc Mozzi, an analyst at French lender Société Générale SA, predicts houses in some parts of London could lose up to half of their value.
“Activity in the housing market has definitely slowed,” said Matthew Hall, a portfolio manager who invests in small and medium-size U.K. firms for Allianz Global Investors.Since the referendum, Mr. Hall has cut his holdings of housebuilders, real estate and home-appliance companies.
The shares of sectors exposed to housing have all fallen. Property broker Foxtons GroupPLC is now 35% below where it was before the referendum. British housebuilders Persimmon PLC and Taylor Wimpey PLC have lost 20% and 22% of their stock value respectively.
But the wider concern is that falling house prices will push nervous Brits to trim their large debt piles and stop spending. In the U.K., it is investment by households, not businesses, that is the more important source of demand for the economy.
Household debt currently amounts to 87.4% of GDP in Britain. By comparison, debt-to-GDP in the U.S. and the eurozone amounts to 79% and 59% respectively.
Most of this debt has been used to buy houses and the value of these properties is a large part of Britons’ wealth. Property makes up 60% of U.K. household assets once pensions are excluded, official figures show.
As long as house prices were rising, consumers kept on taking on more debt and spending. If house prices fall, these families may slash spending and prolong any Brexit pain, economists say.
“All of the last three recessions coincided with sharp rises in the household saving rate,” said Samuel Tombs, an analyst at Newcastle-based Pantheon Macroeconomics.
High house prices mean that the U.K. is particularly exposed. The price of a house in the U.K. is now 5.3 times the average family income, Nationwide data shows. That is almost back to the pre-credit crisis 2007 record-high of 5.4. In London, a house now costs more than 10 times what a household earns, compared with a 7.2-high before the crisis.
Still, analysts also identify several factors that may ease fears of an imminent fall in house prices.
Ultralow interest rates could prop up values, keeping mortgage payments cheap while also easing the debt burden should Britons start losing their jobs.
At the same time, the pound’s post-Brexit fall also makes property cheaper to foreign buyers, who in places like London have been a big part of the demand. An endemic lack of housebuilding could also limit the size of the potential fall.
Paul Diggle, an economist at Aberdeen Asset Management PLC, predicts U.K. real estate is likely to withstand the blast.
Still, Mr. Diggle admitted the fate of the housing market will shape the face of the U.K. post-Brexit.
“The property market leads; the rest of the economy goes,” he said.
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