31-05-2016

How would a Brexit affect the mortgage and housing market?

On the 23rd June the UK will vote on whether we leave the European Union AKA The Brexit. Supposing we do leave or supposing we don’t, what will be the effect on mortgages and housing in the UK? Will house prices plummet and will interest rates jump to unprecedented heights as predicted by some or are the scare tactics simply just that and in fact not a lot will change. We take a look at the possible effects on mortgages and property prices.

Mortgages

In March 2016 Europe introduced the European mortgage credit directive which brought about changes to the mortgage market, you can read more in one of our blogs http://foxdavidson.jamesdev.wiredmedia.co.uk/wordpress/blog/european-mortgage-credit-directive/ Therefore whether we stay in or leave the European Union will not have any direct effect on mortgage policy as the changes have already been introduced. It is unlikely that policy makers would undo the changes brought in by Europe although it would be good to see the poorly named ESIS document made redundant.

The council of mortgage lenders (CML) and the Building Society Association BSA) both commented that a Brexit or not would unlikely have any impact.

BSA head of policy Paul Broadhead says: “If the UK population votes in favour of Brexit it is highly unlikely that we will see much, if any change in the regulatory environment in the short term.  Much of what started in the EU (including MCD) is now enshrined in UK law and regulation.”

A CML spokesman says: “Lenders comply with UK legislation and regulation, and UK regulators currently embed EU requirements into their frameworks.  It would be a matter for them to decide whether or not to propose changes to UK regulation, but there would be no instant regulatory effect.”

An Interest Rate Rise

There are some people that have publicly declared that if we leave the EU then interest rates will increase. One of those is The Chancellor, George Osborne. The chancellor said: “If you look at the view of the experts here at the IMF in Washington it’s pretty clear that if Britain votes to leave the EU then prices will go up and there will be instability in financial markets.

“What that means for families is that mortgage rates are likely to go up. In other words, it will be families paying the price if Britain votes to leave the EU and I think it’s another reason why, frankly, we are stronger, safer and better off inside the European Union”

His reasoning is that on leaving the EU we will face uncertainty in the markets, the pound will drop in value pushing up the cost of UK imports and therefore raising inflation which would be combatted by a hike in interest rates to bring inflation back under control. It is simple economics but there are no guarantees any of the above will happen at any stage, it is all guesswork.

 Or an Interest Rate Fall

In a Reuters poll in April 17 of 26 Economists said if Britain decides to leave the Bank’s next move would likely be a cut.

“If the UK votes to leave the EU, then the BoE is likely to cut interest rates to 0.25 percent, but also restart quantitative easing,” said Azad Zangana, London-based senior economist at asset management firm Schroders.

Kallum Pickering, senior UK economist at the bank Berenberg, said: “I think the most likely scenario following a Brexit, if the Bank of England are going to do either a hike or a cut, is a cut to bolster domestic demand and support credit markets.”

Pickering said the only reason to increase interest rates would be if a fall in sterling turned into a full-blown crisis, akin to Black Wednesday in 1992, when sterling fell out of the European exchange rate mechanism (ERM).

“In the event of a sterling crisis, which is an extreme and low probability tail risk, the BoE might have no choice but to hike to defend the pound and fight off rising inflation. Even though hiking would be the last thing the weakened domestic economy would need.”

House Prices

There are so many pro’s and con’s being put out by either side that it seemed best to bullet point each sides arguments and perhaps you can make your own mind up what will happen to property prices. I would conclude they will continue to grow albeit a bit slower immediately after an exit but still on course to inflate by 25% over the next 5 years as predicted.

RemainBrexit
Treasury says worst case scenario is 8pc decline in house prices by 2018 if we exit. Ratings agency Fitch said prices could fall by 25%.Fall in property prices would bring property prices more in line with affordability.
A report by ratings agency Moody’s said that a Brexit would have the biggest impact on the capital’s housing market, and would lead to fewer sales to EU nationals in central London, which would lead to lower house prices.

It also said properties worth more than £1m would be most affected; 49pc of homes in this band are bought by foreign nationals.

As suggested if the pound falls then Foreign Investors will get more for their money and buying in the UK will be more attractive, property sales wouldn’t change.
12pc of construction workers are EU Nationals. Without them there may be a shortage of workers to build new homes.With less workers, there will also be less renters and thus more homes will be sold by landlords filling the void of new homes. Less EU renters will also bring down rental costs.

Conclusion

Whether we leave the European Union or not we will not see a change to lenders lending criteria. Mortgages will still be freely available.

In the immediate time after the vote on the 23rd in the event of a Brexit we will see instability in the money markets as we adjust to our new settings.

House price inflation may fall but not into negatives and normality will return as the UK property market remains vastly under stocked and demand still outstrips supply.