Posted on 23 June 2016 by
We now know that the UK has voted to leave the European Union in what has been a historic referendum decision. Our expert, Ray Boulger looks at the impact this will have on the UK housing market:
As the financial markets were betting heavily on a Remain win their response is likely to be much more dramatic after the Leave victory.
The FTSE will initially suffer a sharp fall (as it often does post big changes) but the price of government stock will rise, hence yields will fall. This is partly as a result of a flight to safety as the market perceives increased risk but also because it now expects interest rates to remain low for longer. Uncertainty over economic activity and indicators will probably extend for at least the minimum two year period during which our exit negotiations will take place.
The Bank of England Base Rate and other short term interest rates are unlikely to change much, simply because they are already close to zero. A fall in gilt yields will reduce the cost for lenders of longer term funding and hence open the door for even cheaper fixed rate mortgages. Most mortgage lenders did not pass on much of the pre-referendum reductions in rates so we can now expect to see a bit more price competition, especially in the longer term fixed rates.
Although there have been a few reports of potential buyers holding off committing to buying a new home pending the result of the referendum, these people still have to live somewhere and with mortgage costs at worst stable, but probably falling, these buyers should use the uncertainty as a way of trying to negotiate a lower price rather than pulling out of the transaction.
In the short term there is likely to be some stabilisation of house prices, or small falls, but low interest rates, good mortgage availability and an ongoing shortage of new supply will prevent anything other than a small fall. The one exception is likely to be the top end of the London market, say properties worth more than £1.5m.
A higher proportion of buyers in that sector of the market are from outside the UK (and indeed outside Europe). This group is likely to take more time to assess the impact of the referendum result on them, but in time even these buyers will return, especially as the UK will continue to be seen as one of the safest places to invest in a politically stable environment. Stamp duty for properties in this price bracket will continue to restrain it, as will the Government’s recently announced increased disclosure requirements for property acquired by offshore investors.
A longer term look at implications for the housing market suggests demand will continue to increase until we actually leave the EU, as immigration is likely to continue especially in the run up to any potential tightening of border controls. As house building is still low compared to the UK’s needs, pressure on prices from an increasing population will continue. This may be exacerbated as another potential deadline approaches for those looking to relocate to the UK.
The Leave victory will have significant political implications, almost as much in Brussels and the other member countries as in the UK. It will open a Europe-wide discussion on how the union should develop. Based on recent polls in Scandinavia, some other member states are likely to seriously consider leaving the EU.
Our economy is of course closely linked with that of the rest of the EU therefore such developments will be doubly important to the progress of the UK economy. It also means that the euro could easily come under pressure and so, whilst sterling will initially fall against the dollar, it should perform better over the medium term against the euro.
Once we have left the EU the FCA will have the opportunity to consider whether to reverse any of the new mortgage rules introduced this year as a result of the EU Mortgage Credit Directive. There is widespread agreement by the industry, regulator and Government that the EU definition of a foreign currency mortgage is, not to put a finer a point on it, "ridiculous". I would therefore expect the FCA to rescind this definition, which would allow UK lenders to revert to their previous common sense approach is assessing applicants with non-sterling income and / or assets.
An interesting challenge for the FCA will be whether to continue with the European Mortgage Directive and the new ESIS (European Standardised Information Sheet). Lenders currently have the option to continue using the existing illustration format until 2019, by adding a few more details, or use the ESIS. Most lenders have chosen the former. It remains to be seen how quickly the FCA reacts to this new potential return to the status quo.
The overall assessment for borrowers continues to centre on the historically low fixed rates. Should bond yields fall and the longer term fixed rates reduce accordingly then this remains to be the best time in decades to secure a fixed rate, especially for the longer term. However, there are many changes ahead and change brings uncertainty, which can be lessened with fixed rates today.
Let us know what you think of the result. Take our online poll here.
The blog postings on this site solely reflect the personal views of the authors and do not necessarily represent the views, positions, strategies or opinions of John Charcol. All comments are made in good faith, and John Charcol will not accept liability for them.