Article 50 has finally been triggered by The Prime Minister, Theresa May. This means that the process for Britain leaving the EU is underway. The negotiations are anticipated to take up to two years for the country to secure relationships with our European neighbours. Whilst there is much uncertainty surrounding the future of Britain in Europe, there is no doubt that Brexit is going to happen. How will this effect the UK Housing Market?
What impact will Brexit have on the UK’s economy in general is the first question we need to ask ourselves. Since the beginning of 2017, the majority of economists have been predicting that the economy will experience a modest downturn in the coming months. Without going too deeply into the confusing macro-and micro-economics informing their opinions, they seem to believe that the ongoing uncertainty around Brexit will drag down investment, the jobs market and wage growth.
It is very important to note that, at this moment in time, there are no predictions of a recession, but more importantly a slight deceleration in the speed of the economic growth.
Another point that we need to consider is what is happening in other countries around Europe. Brexit has been the catalyst for election campaigns in a number of European countries, specifically, France and Germany. The outcomes are by no means certain and with Trump’s first term in office this has caused further uncertainty. Economies are closely related to one another these days, and affairs in these countries may affect the Britain in one of two ways. Firstly, they might exacerbate our own position, turning a minor downturn into a more serious recession. Alternatively, they might make Britain look like a comparatively safe option and attract investment to our shores.
What will Happen with Lending and Mortgages?
Lending institutions in Britain are offering extremely cheap borrowing largely due to the base rate being at an all time low of 0.25%. Generally speaking, lenders are desperate for your business in the current climate but there are some lending markets that have declined over recent times due to the rigorous new legislation around buy to let borrowing. Buy to let mortgage approvals are on the decline and with new legislation around taxation for landlords, this is likely to further decline over the next few years.
It is difficult to predict whether this trend is likely to continue over the coming months. It will be largely dictated by the Bank of England Monetary Policy Committee and whether or not they decide to increase the base rate. Most economists feel that an increase in the base rate is unlikely in the short to medium term. That said, the economy in general is looking vulnerable and this has been the Bank of England’s justification for maintaining the low base rate.
Last year’s cut in rates was expressly intended to head off any concern caused by Brexit. If the economy is expected to calm down a little, then surely rates will remain low. Inflation is expected to rise to around 2.7% by the end of this year, and policymakers might feel compelled to raise rates to contain it and prevent it from rising further.
So, if we do witness an increase in the base rate, it is likely to be very small in the scheme of things – probably 0.25%, thus the rate would still be very low. If the base rate doubles, this could have a major effect on people who are considering taking out mortgages. Banks and building societies would also have to adjust the interest rates on many of their products, making them less affordable. With wage growth stagnant, even a small increase could make the critical difference between being able to take out a mortgage and having to put off buying a property.
What Impact will this have on UK’s House Prices?
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Certainly, across much of the UK, price growth has defied pre-referendum predictions of doom and gloom and has largely shrugged off the impact of Brexit. Central London has, of course, seen a marked decline in its housing market, a slowdown that has been attributed in equal measure to Brexit and to the new tax framework for investment properties. Elsewhere in Britain, though, house price growth has remained steady.
The experts believe that the wider post-Article 50 economy will subdue the housing market, with a weak jobs market, high inflation and minimal wage growth affecting consumer confidence, especially around large transactions like house purchases. That said, we aren’t on the precipice of a house price crash. Housing economists still believe that there will be some growth during the rest of this year, many predicting around 2% over the course of 2017. This is because the country’s chronic housing shortage supports growth, even in sub-optimal economic conditions.
First time buyers were probably hoping for the cost of residential property to fall. Homeowners, on the other hand, rarely welcome a drop in the value of their house or flat. The lack of clarity is frustrating for those of us who just want to know the direction of “house prices in my street”. The best estimate is that very little change is currently being forecast outside of Central London.