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Battening down the hatches – what a Greek exit would mean for the UK mortgage market

At the beginning of the year, I wrote a blog predicting a Greek departure from the euro. I suggested that this was the inevitable scenario given that Greece has debt at 144% of GDP and its economy was and is in a downward spiral of contraction and austerity.

Well, now most analysts have come out of the woodwork and seem to agree with my view.

In my posting, I also suggested that although Greece would take a massive hit, optimistically its departure could be manageable if the markets were convinced that no other countries would follow, particularly vulnerable countries such as Spain and Italy.

I said that it would need international officials to put a firewall around Greece to avoid the markets getting spooked. Of course all this holds true today although thus far I’m not sure if European officials are doing enough to reassure the markets as witnessed last week.

Confusion reigns supreme with Angela Merkel and President Hollande saying that they want to keep Greece in the euro but Christine Lagarde, head of the International Monetary Fund raising the possibility of orchestrating an ‘orderly exit’ for Greece from the eurozone.

So there you have it, although I still predict a Greek exit sooner rather than later, I guess much hangs on how the Greek elections in June turn out.

So what would a return to the drachma mean and how would the UK, in particular the housing market, be affected? It all comes back to my earlier point and how the exit is handled. Worst case scenario it will be complete chaos.

In the words of Charles Dallara, the International Institute of Finance chief,  the damage to the rest of Europe from a Greek exit would be ‘somewhere between catastrophic and Armageddon’.

Therefore potentially a complete temporary collapse of the banking system although from a UK perspective, Mervyn King, governor of the Bank of England has suggested that contingency plans are in place were this to happen after warning that the eurozone was showing signs of ‘tearing itself apart’.

Even in the best case scenario, the UK would inevitably be affected by this scenario.

Already there are signs that investors are spooked as customers withdrew their monies from Santander UK in the wake of the downgrading of the bank’s credit rating. And we should expect more or this jittery behaviour.

On a national level, certainly economic growth would collapse as our export market would nose dive bearing in mind half our market is in the eurozone. Plus our goods would be that much more expensive to buy as our currency increases in value being perceived as a (relatively) safe haven.

As for the mortgage market, I foresee banks resorting to behaviour last seen at the outset of the credit crisis, storing up capital and abandoning aspirations of market share.

This is evident already to some extent and with more stringent regulation on the horizon, in the form of Basle III which will have a wide ranging impact on bank’s capital holdings, this behaviour is set to continue. 

With total disruption to banking and capital markets, it will prove harder for banks to raise new debt and significantly more expensive. So the cost of funding would inevitably rocket and homeowners would be hit by increases in mortgage rates.

Banks would be keen to pass on costs to the consumer so upward pricing of mortgages would persist. On top of this mortgage availability would dry up and the possibility of obtaining credit would dwindle. This will inevitably have a knock-on effect to house prices which will fall significantly as consumer confidence is dented further.

The exception to this would be the London market where luxury houses in particular will rise exponentially. Already Savills reports that homes costing more than £1.5m jumped by 39% in April as investors from Greece and Spain in particular seek a safe haven for their monies.

All in all, not a rosy picture then. But going full circle, back to my blog again, it all comes down to how orderly our plans are to resolve the situation. Because resolve it we must before we, and our EU partners, can move forward.


Marketwatch – May 2012

Greece is the word this week, so is Spain for that matter, but there is nothing anyone can do about that.

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  • Shaks 24th May 2012 at 12:25 am

    So if Greece defaults on its loans does that mean the country will get repossed? Who would be the marketing agent?

  • David Sellenby 22nd May 2012 at 5:05 pm

    oh dear another mortgage bloke pretending to be an economist. Stick to your fixed rates and trackers.

  • Michael White MD Boutique Capital 22nd May 2012 at 12:56 pm

    The predicted impact on the mortgage market is already happening. Hugely negative sentiment driven by an abundance of ‘bad’ news augmented by the ‘self-protect’ ‘no risk’ strategy of the banks…. very ably assisted by the regulators and rating agencies who are rewarded for structured negativity.

    Unfortunately, a somewhat vicious circle now exists from which there appears no obvious escape.
    I actually think the euro club is now bust….the grand plan by our German cousins for European domination is no longer viable.

    Let Greece be what it is ‘bankrupt’. What follows may not be much fun but we all know that there are times that it is best to turn off the life support machine.

  • bobby 22nd May 2012 at 12:33 pm

    A self fulfilling prophecy.

  • Anne Somerville 22nd May 2012 at 11:44 am

    I can’t believe some of the comments to this article. All Ward has done in the above article is portray the current dilemma facing the UK as it relates to the crisis in Europe. Yet again it seems the response of many is to just stick your heads in the sand, demand good news and deny there’s a problem. Yes the mortgage market is in dire straits but so is the whole UK economy. This isn’t some media myth – the UK is in recession, if Greece leaves it will only get worse. But the good brokers out there will survive, as they have done during other crisis.

  • Dr SP 22nd May 2012 at 11:31 am

    I’m not sure why you’re getting upset Bobby, it’s about as positive as your usual outlook on everything that appears on this site…

  • Bobby 22nd May 2012 at 11:01 am

    Tony is probably on a fat wage with no worries unlike a broker fighting for every deal to keep his house and feed his family. His comments are similar to Robert Peston who has made a good career on the back of spreading misery and doom and gloom. I already have 2 people who made offers on property in the last week now reconsidering and staying put due to the armagedon news which is a word I notice Tony liked to use. So please STOP and try and put some positive news and MS are as much to blame as Tony for giving his views any space.

  • Anon 22nd May 2012 at 10:08 am

    If there’s any positive news regarding the Mortgage Market we could all really benefit from it right now MS. Good news doesn’t make bad reading you know…

  • AA 22nd May 2012 at 10:05 am

    So all members of the G8 are FOR Greece to stay in Euro; as well as the greeks. Cant see it happening. 24/7 news is doing more damage than good.

  • Andrew Carter 22nd May 2012 at 10:02 am

    No disrespect, but what is there in this article that I haven’t heard every day for the last two weeks on Sky News.

    I like the fact that you opened with the reminder that you predicted Greece would leave the Euro months ago, and the fact that you are still peddling the same line. I suspect you are wrong.

    Sure, due to the finite number of outcomes (they stay in or leave) eventually you will probably be proved to be right. You (and your grandchildren) may well have died by then, of course.

    The appetite for Greece to stay in the Euro, coupled with the disaster if they leave will probably be enough for the wealthier nations to continue to pump funds into the troubled state and/or write off large chunks of their debt.

    What I really like about your article, though, is that you manage to vary your forecasts to include all possible outcomes if Greece do, eventually, leave the Euro, so that you can’t be wrong. However, this has the disadvantage of ensuring that you, actually, say nothing at all, and merely regurgitate what all the news media have been saying for weeks.

  • Phil 22nd May 2012 at 9:34 am

    So a nice positive outlook then. I think what must be realised is that if banks continue to raise rates then there will be more people defaulting on their debts only adding to the problem.

  • Bobby 22nd May 2012 at 8:08 am

    Thanks for that Tony. Shall we all just give up now then ?