Many factors determine the equilibrium house price including build cost, the availability of credit & mortgage interest rates, the outlook for employment and wage growth as well as land availability. Most of these factors are broadly supportive for the UK housing outlook.
However, in January 2021, following the end of the Brexit transition period, the UK has enshrined into law a new points-based immigration regime. We expect this, and a slowing birth rate to negatively influence population growth over the medium to longer term.
It grew at an average 0.75% rate from 2006 until the Brexit vote in 2016. A decline toward 0.3-0.5%1 is now likely in the coming decade. This has wide ranging implications for the UK housing market and banking system, as well as many business who rely on cheap foreign labour.
Old system (before January 1st 2021)
The old system distinguished between region of origin:
EU: There were no restrictions for EU immigration. EU citizens (and their dependents) were free to live and work in the UK as if they were citizens of the country.
Over 3.7 million EU citizens now live in the UK with Poland, Ireland and Romania accounting for over 1.6 million of this group. Nearly 1.2 million EU citizens live in London, with a further 0.8 million living in the surrounding East and South East regions.
EU citizens are more likely to be employed, have a third level degree (or higher) and make a positive net fiscal contribution to the UK government budget. In essence, they have allowed the UK to grow faster and more productively than otherwise would have been the case.
Non-EU: These were always subject to several criteria for entry:
- Minimum skills (RQF level 6) and salary levels (£30,000-55,000, depending on demand for visas).
- A cap on numbers.
- Employers must test the availability of local workers before recruiting abroad.
- Dependents are allowed to join.
Non-EU migrants are increasingly migrating for study. UK universities are among the highest ranking in the world and they attract significant numbers of foreign students.
New points-based system (effective from January 1st, 2021)
As of January 1st 2021, EU and non-EU migrants are treated the same. Both are subject to a new point-based system where 70 points must be accumulated through a set of mandatory and “tradeable” criteria.
- The mandatory criteria awards 50 of the 70 points:
- Employees will need to have a job offer and employers will need to sponsor migrants.
- The job must be at an appropriate skill level (RQF Level 3 or higher).
- Migrants must be able to speak English.
- A further 20 points are required from tradeable criteria:
- Up to 20 points from offers paying salaries above £20,480. Salaries below this level are ineligible to apply.
- 20 points if the offer is in a sector with a job shortage
- Up to 20 points for a PhD in a field relevant to the job offer.
- No cap on skilled workers or students.
- Seasonal agriculture workers will be facilitated through a separate scheme.
- Dependents will be allowed join migrants.
It is clear that this regime is designed to refuse/ limit the ability of lower-skilled EU migrants to enter the UK. For example, a barista working in London earns £17,379. This is below the threshold of £20,480. Even if such salaries were above the threshold, the applicant would still be below 70 points (there is no job shortage, and a PhD is not relevant to the work).
Implications for migration flows
Overall, work related and total net migration flows (immigration less emigration) are likely to fall to close to 190,000 annually from the current 260,000. In particular:
- EU inflows are likely to reduce:
- For the first time, EU migrants will face bureaucratic hurdles.
- Priority will be given to skilled migrants. This will mean continued access for many West EU migrants but restrictions on East EU migrants.
- Non-EU inflows will continue:
- These migrants already face paperwork.
- A RQF threshold of Level 6 (bachelor’s degree) currently applies. This will fall to RQF Level 3 under the new regime, meaning more will become eligible.
- No significant changes are proposed for students, meaning their numbers should be at least maintained.
While 190,000 is a fall from current levels, it is far from the Conservative Party’s old target of 100,000 annual net migration. This is unlikely to be met. This was dropped at the 2019 election in favour of the points-based system.
The lowering of the salary threshold to £20,4802 was a change made in October 2020. Oxford University’s Migration Observatory described the change as “the final nail in the coffin of the (Conservative Party) net migration target.”
Impact on UK house prices
Immigration has been a major supporting factor for UK house prices for many years. In particular, London has been a major beneficiary, with close to one third of the current total stock of EU migrants residing there (c. 1.2m people). A structural change in the flow of newcomers is likely to act as a downward force on house price growth. In addition, the house price outlook will be influenced by the 3.8m current EU residents currently in the UK. A key assumption is that they do not seek to change their current address but rather remain in the UK. This is a risk with this chart showing that over half of London rental tenants are foreign citizens.
We discussed these trends recently with the Financial Times in a piece titled “What London’s falling population means for the housing market”.
1 These forecasts do not consider the impact of COVID-19, which is likely to have reduced both the birth rate and net migration flow further in 2020.
2 A higher number was suggested in prior proposals, which would have limited migration flow further.
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