In the post Brexit world (or at least post the decision to Brexit, as the actual deed is still well over 2 years away) little has changed in the housing market 3 months after the referendum except that mortgages have got cheaper, although there are still plenty of uncertainties ahead.
In the short term it was always obvious that because a vote for Brexit would result in the UK entering completely unchartered territory, unless you consider Greenland leaving the EU when it ceded from Denmark is a precedent, there would be a huge amount of uncertainty on the economic impact of the vote.
The immediate sharp falls in equity prices and sterling, plus the equally sharp rise in gilt prices, and hence falls in yield, were all totally predictable, as the direction of travel in these markets was clearly indicated when the polls started showing Leave in the lead a fortnight before the referendum. The only question was what the scale of these movements would be.
The biggest short-term surprise, presumably especially to George Osborne and others who had been forecasting Armageddon, was the scale and rapidity of the bounce back in the FTSE 100. If “experts” were trying to find a way to damage their credibility it would have been hard to think of a better way than with some of the bogus claims made during the campaign. This raises an interesting question: did these “experts’ fully believe what they said or were they prepared to compromise their beliefs for the cause?
Some foreign investors providing funding to niche lenders initially withdrew from the market but none of the mainstream lenders tightened criteria or restricted lending. However, to avoid the risk that liquidity might become a problem the Bank of England immediately made substantial funds available to banks, very little of which was taken up.
Despite some initial reduction in housing market activity, especially in London and the South East, we now have statistics for both housing transactions and mortgage lending in August, plus mortgage approvals for July, all of which suggest it is business as usual. These statistics provide robust evidence that the UK consumer has not been deterred from buying a home following the referendum. In fact the estimated £22.5bn of mortgage lending in August was not only the highest August figure since 2007, but also the highest monthly figure so far this year and higher than any month last year.
This week the ONS released a study suggesting the vote to leave the EU has not had a significant effect on the UK economy. The house price statistics show little change post referendum and the major house builders are reporting reservations holding up well. Likewise car sales in August were the highest for that month in 14 years.
However, one sector where there was a negative reaction is commercial property. Although robust statistics are harder to come by than for residential property there was a substantial increase in withdrawal requests from several open-ended commercial property funds and those funds without sufficient liquidity were forced to suspend dealings and sell some of their portfolios. Such forced sales obviously added to the negative sentiment in the commercial property sector as well as highlighting the risks of open-ended funds investing in illiquid assets.
Further evidence of the impact on the commercial property sector is provided by a statement from the Financial Policy Committee on 22 September, which included the comment that “In the UK commercial real estate market….prices have fallen and transactions are at their lowest level since 2009.”
The employment statistics suggest that so far there has been no significant effect in the labour market but there is anecdotal evidence that some companies are deferring investment decisions until the landscape becomes clearer and that some jobs will be exported to the EU. However, over time this is likely to be a two way process and as highlighted by think tank, Civitas, 60% more jobs in the EU are linked to trade with the UK than UK jobs linked to trade with the EU (5.8m v 3.6m).
The initial sharp fall in gilt yields, referred to above, was extended in August after the MPC not only cut Bank Rate to 0.25% but also indicated a further cut, probably to 0.1%, was likely in November. Further pressure on longer term interest rates to not only fall, but also stay low for longer, was provided by the announcement of another round of Quantitative Easing, including some Corporate Bonds, and that The Bank would offer cheap money (at close to Bank Rate) to banks to “encourage” them to pass on the full 0.25% cut to mortgage borrowers.
The huge fall in gilt yields translates into a similar fall in swap rates, enabling lenders to buy much cheaper fixed rate money and so offer even lower fixed rate mortgages than were available pre referendum.
A straw poll on our web site the weekend after the referendum found that two of the biggest consumer concerns were an increase in mortgage rates and house prices falling, both of which were among the most eye catching claims by the Remain camp of what would happen in the event of a Brexit vote. In the event the subsequent cuts in mortgage fixed rates, even before the 0.25% August Bank Rate reduction, will have helped to reassure consumers their mortgage costs were not only not going to increase, as claimed, by up to £1,500 p.a. but would actually fall.
As far as the mortgage market is concerned the vote for Brexit has therefore so far had mainly positive effects, with cheaper mortgages and little change in house prices. Although there have been some cuts in 2 – 5 year rates the biggest changes are in longer term rates, with several lenders adding 10 year fixed rates to their product choices, or reducing rates on existing 10 year fixes.
The longer the fix the more important it is to take account of the early repayment charge (ERC). For a significant minority of borrowers unexpected events are likely to occur over a 10 year period and so onerous ERCs in the latter part of the term are of particular concern.
This factor, combined with offering the lowest interest rate for any 10 year fix, makes Coventry the clear market leader in this sector. Its 10 year fixed rates are 2.39% up to 50% LTV and 2.49% to 65%, with ERCs of only 1% in the last 5 years. It also offers a 10 year fixed rate offset mortgage at 2.75% up to 65% LTV, which also has ERCs of only 1% in the last 5 years but also, as is intrinsic with offset mortgages, effectively allows unlimited ERC free part repayments throughout the whole 10 years, with a guaranteed ability to borrow back any overpayments at the same rate.
Despite the biggest falls in interest rates being for the longest terms and the differential between 10 and 30 year rates being well under 1%, making this an ideal time to lock into a 25 – 30 year fixed rate, no mainstream lender has yet been prepared to offer a fixed rate for a term of more than 10 years. As well as the fact that the long term swap market is very thin a concern appears to be counterparty risk, i.e. the risk that whichever bank the lender arranges a long term swap with won’t be around in 25 – 30 years. This is nothing to do with Brexit but evidence that 8 years after the failure of Lehman Brothers that event is still resulting in market failure in certain sectors.
The only fixed rates on offer in the residential market for more than 10 years are for Lifetime mortgages, where some rates are now below 4%. This market is restricted to borrowers over 55, but is the mortgage sector that has seen the largest drop in rates as a result of the referendum. Although Lifetime mortgages are designed as interest roll up mortgages, several lenders allow ERC free overpayments of up to 10% p.a., which means borrowers who wish to do so can pay the interest and treat them as an interest only mortgage, or even pay more if they wish to reduce the outstanding balance.
One organisation that has come out of this reasonably well is The Bank of England. It had a plan for Brexit, which it put into effect on 24 June, whereas it appears the Government hadn’t properly prepared for the eventual outcome. David Cameron admitted after the Scottish referendum that, despite his pre vote assurances, if Scotland had voted to cede from the UK he would have resigned. Following that admission it was always obvious he would resign if he lost the much more important EU vote.
Whatever work the civil service may have done to plan for Brexit, shaping the plan and subsequent negotiations would fall to whoever took over from David Cameron and so it is perhaps not that surprising that the Government appears to have been ill prepared for the referendum result.
We are only three months into a process that will take nearly three years to play out and even longer to assess the long term pros and cons. However, even the staunchest proponents for Remain have to admit that the short-term impact has been more benign than they expected.
One thing that is certain is that for mortgage borrowers the Brexit vote has provided a huge opportunity to lock into a fixed rate mortgage that is cheaper than any homebuyer will have previously seen. The only question for many will be how long to fix for, which is just one question with which good independent mortgage advice can help, but choosing which of a wide range of best ever deals to select is a nice choice to have!