Changing Dynamics Of Costs Structure In Housing Market

  • Feb 25, 2019 GMT
  • Team Kalkine
Changing Dynamics Of Costs Structure In Housing Market

The United Kingdom's property market has undergone a dramatic change in the last few months. While the housing prices were increasing by an average of 5 per cent before Brexit, markets are experiencing a fall in values, coupled with an increasing cost of construction. The Brexit uncertainty has further augmented the problems that have troubled the market and is not expected to soothe any time soon. Bank of England governor, Mark Carney, predicted a drop of 35 per cent in housing prices if Britain crashes out of the European Union without any deal in place. 

A no-deal Brexit, which seems more likely with every day, will cause a high degree of hesitancy among buyers as well as developers. This is predicted to harm the housing market's activity until confidence is restored. Price performance across the country has varied since the referendum, with prices in London and the south-east remaining stagnant while some areas have witnessed a growth of 5 per cent. Moreover, according to industry figures, housebuilding has declined sharply in London and the Midlands in recent time. The number of new homes in London, East Midlands and West Midlands fell by 10 per cent in 2018.

Another shift that can be seen in the industry is towards an increasing number of first-time buyers, reaching its highest level in twelve years. This has been mainly due to government scheme such as Help to Buy, which aids with a mortgage to first-time buyers. In fact, the number of homes bought with a mortgage by first-time buyers in 2018 was more than existing owners with mortgages moving to a new home. The same trend is expected to continue in 2019.

The change in industry dynamics due to Brexit and other trends is getting reflected in fundamental changes in costs as well. One of the most immediate impacts on input costs was due to steep depreciation of pound following the EU referendum. According to some estimates, two-thirds of construction materials are imported directly from the EU, and depreciated pound has increased the cost of importing. The material prices are expected to rise further with recent research demonstrating that 87 per cent of builders believe that input costs will increase in the next six months.

The increase in input costs does not stop at the depreciation of the pound. The country currently enjoys frictionless trade with the other EU members within the customs union. This ensures goods can flow within the bloc without any restrictions or tariffs. Leaving the union would mean that border tariffs would be re-imposed and free movement of goods will be restricted. This could potentially lead to a shortage of input materials, which in turn may lead to increased costs.

Probably more serious impediment for the industry would be the non-tariff barriers that would be imposed. These include regulations, standards and other red tape that will have to be borne by the UK whilst trading with another country. Rather than enjoying free movement, products would be checked at the border, increasing the possibilities of long delays. Confederation of British Industry estimates average non-tariff barriers will amount to 6.5% on costs, on top of new tariffs. The industry that works on ‘just-in-time' delivery model will be severely hit by it and have to keep a stockpile of inventories.

The country is also a part of ‘single market' which allows free movement of citizens within the bloc. The construction industry is reliant on foreign migrant labour for skilled and non-skilled roles; government data shows 33 per cent of workers on construction sites in London were from overseas, with 28% coming from the EU. The company's access to foreign labour will be largely constrained after Brexit. Due to this, the industry can experience a higher labour cost which can further increase costs of construction. This can have a direct effect on the capacity of housemakers to reach the government's objective to build one million new homes. A decline in housebuilding induced by rising labour costs can worsen the housing crisis faced by the country. Additionally, the country's inflation looks resilient, with a further spike in inflation expected after Brexit. This cost-push inflation will further increase the cost of inputs.

The construction sector has a close relationship with the health of the broader economy. The industry is dependent on confidence in the economy, which has taken a severe hit in recent time; optimism amongst business has sunk to its gloomiest since the height of the global financial crisis. Despite everything, it is unlikely that the country's exit will lead to a very steep decline in market price. According to pundits, the housing market is not as volatile and quick to react as other assets market.

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