How would a Brexit affect the mortgage market?

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A Brexit from the European Union is unlikely to hit the UK mortgage market hard, according to economists and trade bodies.

A vote on whether the UK stays in the EU will be held on 23 June, Prime Minister David Cameron announced last weekend.

Cameron wants the UK to remain part of Europe, but London mayor Boris Johnson has joined other senior government ministers in calling for independence.

Regulation

The Council of Mortgage Lenders and Building Societies Association both believe existing UK mortgage regulation would be unaffected by a Brexit unless the UK made a conscious decision to change it.

However, what it would mean is that the UK would be able to form its own regulation in the future.

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.”

Lending

However, both trade bodies are undecided on any further impact of Brexit on the UK mortgage market, such as whether it would affect lending.

Broadhead says: “Irrespective of the response to the EU question by the UK population on 23 June, the housing market in the UK will still be there afterwards.

“Consumers will still need and want to buy homes and building societies will be supplying mortgages.  Clearly this market works best in the light of a healthy economy, which is something everyone can agree on.”

A CML spokesman says: “The CML is unlikely to take a specific view on the merits or otherwise of Brexit; our members may have a variety of views based on their own assessments of their businesses.

“As a relatively small, open economy and a major financial centre, the UK has, and will continue to have, close links with global economies, including those within the EU.

“There is no simple answer to the question of how Brexit might affect housing and mortgage markets.”

Mortgage rates

Virgin Money chief executive Jayne-Anne Gadhia says a Brexit could cause UK job losses and eventually cause mortgage rate increases.

Speaking to the Telegraph, Gadhia says the UK voting to leave the EU would lead to a spiral of inflation, job losses and interest rate hikes that would cause mortgages, and other financial services, to become more expensive.

House prices

Opinion is split on whether Brexit would increase or decrease house prices.

A Brexit would be unlikely to affect house prices, says Capital Economics chief property economist Ed Stansfield.

He says: “I have to confess that my own view is that the UK will do reasonably well if we’re in or outside of Europe.

“But it’s possible that the UK could be slightly less attractive for overseas buyers, in particular London. So you could see some drying up of demand, particularly at the top end of the London market, as a result of that. I guess, to an extent it also makes it more difficult for house builders to get overseas workers in, who are a key part of the construction sector.”

However, an Emoov survey finds that a third of homeowners think a Brexit would increase their property value.

Inflation

Market commentators are also divided on whether Brexit would cause inflation.

HSBC analysts say that a Brexit vote would cause economic uncertainty. This would lead to a drop in sterling of 15 to 20 per cent, which could then cause inflation of up to 5 per cent, they say.

But Stansfield says that inflation is unlikely if the UK leaves Europe.

He says: “More broadly speaking, the fear doing the rounds is that currency will collapse to such an extent that it puts upwards pressure on inflation and inflation expectations. That means interest rates could well go higher than you would otherwise think they would. All being equal, that would probably tend to choke off demand for mortgages.

“Since the MMR was introduced, the compulsion to stress test new mortgage products against a three percentage point rise in interest rates should give the market a degree of durability that we shouldn’t see a massive spike in defaults and payment problems and bank losses, so you wouldn’t necessarily expect that to feed into a credit crunch in the mortgage market.

“You’d need to see the currency fall a very long way before that would become a big enough threat to the inflation outlook that the bank of England would start to raise interest rates to the level that would start to cause problems.

GDP

A ‘leave’ vote could hit gross domestic product in the short term, before it rises long term, according to a report from Open Europe.

The report says that UK GDP could be 2.2 per cent lower in 2030 if Britain leaves the EU without striking trade deals or reverts into protectionism.

The report says: “In a best case scenario, under which the UK manages to enter into liberal trade arrangements with the EU and the rest of the world, whilst pursuing large-scale deregulation at home, Britain could be better off by 1.6 per cent of GDP in 2030.

“However, a far more realistic range is between a 0.8 per cent permanent loss to GDP in 2030 and a 0.6 per cent permanent gain in GDP in 2030, in scenarios where Britain mixes policy approaches.”