There were some scary predictions made about the consequences of a Brexit as the ‘leave’ and ‘remain’ camps waged their campaigns. Then-chancellor George Osborne was slated for his suggestion that interest rates may rise, while Bank of England (BoE) governor, Mark Carney, was criticised for saying the UK’s decision to leave the EU could trigger a technical recession.
Even the International Monetary Fund (IMF) warned of the potential for severe regional and global damage if the UK voted to leave. Unfortunately, the BoE’s latest Financial Stability Report seems to confirm some of the dire predictions made.
In his opening remarks, Mr Carney reminded us that in March the Financial Policy Committee had identified the risks around the referendum as “the most significant near-term domestic risks to financial stability”. These risks, he said, had begun to crystallise.
He pointed to the largest fall in sterling against the dollar in 50 years, a dramatic fall in foreign flows of capital into commercial real estate, and evidence that uncertainty about the referendum has delayed decisions on business investment, construction and housing market activity.
Even before the outcome was known, Mr Carney made it clear that measures had been put in place to shore up financial and economic stability in the event of a vote to leave the EU. It has moved to boost banks’ lending by up to £150bn, and is on standby to revive quantitative easing and funding for lending if they prove to be necessary.
He has sought to reassure the public that the UK is in a better position to face the consequences of Brexit than it was to deal with the global financial crisis of 2008. So what is the likely effect on the mortgage market? It is still early days, but the wait-and-see approach many adopted in the run up to the vote is likely to persist as investors, businesses, house buyers and sellers put transactions on hold because they are unsure of what lies ahead.
This may lead to a reduction in house prices, with some commentators speculating that first-time buyers might be able to get on the housing ladder more easily. However, low interest rates, competitive mortgage deals and the housing shortage mean prices are likely to remain largely stable.
Mr Carney has already suggested that another interest rate cut might be in the pipeline, and as gilt yields fall and more funding is made available to lenders, there will be more price competition in the market. How long borrowers are prepared to wait is difficult to tell.
As mortgage guru Ray Boulger, senior technical manager at mortgage experts John Charcol, says, while people may have held off buying to await the result, they still need somewhere to live. Since more attractive rates are likely to become available, borrowers are being encouraged to take advantage of fixed-rate deals in particular to weather the period of uncertainty.
The London property market is likely to see the greatest falls as foreign buyers adopt a wait-and-see attitude. The Bank’s report documents that, since 2009, overseas investors accounted for 45 per cent of transactions in the UK commercial real estate sector. But in the first quarter of 2016 the number of overseas investors in that sector halved.
Legislation
Another consequence could be that the FCA chooses to ditch some of the mortgage legislation imposed by EU membership. Of course, that is something to be decided after the UK has negotiated its way out over the next couple of years, and Mr Carney made it clear that financial regulation in the UK will not change until EU law ceases to have effect.
Two concerns highlighted in the report are vulnerable UK households and the buy-to-let sector. It points to indebted UK households vulnerable to unemployment and economic shocks. It also reiterates the fear that buy-to-let investors could behave pro-cyclically, amplifying movements in the housing market.
Chart 1 shows the number of property transactions up to May 2016. The huge spike is thought to be due to the rush to buy property before stamp duty changes on second homes came into force in April. The Council of Mortgage Lenders estimates buy-to-let purchases increased by more than 180 per cent from February to March 2016.
Describing the outlook as “challenging”, Mr Carney made the position clear: The UK has entered a period of uncertainty and economic adjustment, and the BoE’s efforts will not be able “fully and immediately” to offset the likely market and economic volatility during this adjustment.
Also, the future of the economy and the implications for jobs, wages and wealth are out of the Bank’s remit, but will be driven by decisions made by those in the public and private sectors.
However, he says the BoE can help facilitate these decisions, smooth economic adjustments and help UK households and businesses seize new opportunities. In a bid to reassure his audience, and promote financial stability, Mr Carney says, “The Bank has a clear plan. We are rapidly putting its main elements in place and it is working.”
