Business

Brexit B-Day house price risks

A disruptive Brexit is forecasted to have a 4.25 per cent inflation impact plus 14 per cent downside property risk.
Peter McGahan

BREXIT: It's like trying to use a kitchen roll for a boat sail in a multiple angle storm.

I'll cover the impact on your money in the lead up to Brexit B-Day.

If there is one thing that will hit sentiment and house prices, it's liquidity, the ability to borrow, and at what rate.

On the one hand, Mark Carney states that a no-deal Brexit may force interest rates to rise, and in just over a month, states that interest rates will need to rise quicker if Brexit goes smoothly.

In this arduous squall of political opacity, it's hard to know who on earth to trust, and for what reason.

With record debt in the UK, it's easy to see the impact it would have on house prices. At best it would put huge pressure on any further upward movement.

A ‘hard', or ‘no deal' Brexit is never going to be good for anyone. Let's assume (hope) they wouldn't put that before any political gains.

You will have seen what has happened to sterling since the vote, and in the last two weeks since there was an agreement that a no-deal could be voted down. Formally Sterling nose-dived, laterally it has bounced. Markets do not want a no-deal.

If there is a no-deal, interest rates have to rise to curb inflation. Remember, the UK is a net importer. A weak currency ensures imports are more expensive and so you pay for it everywhere.

The Bank of England (BOE) has clearly stated that the UK could go into a recession deeper than the financial crisis and you might argue that Carney should therefore look beyond the imported inflation and instead view no deal as a temporary scenario?

The BOE forecast inflation as high as 6.25 per cent in the event of a no deal and a 30 per cent downward impact on house prices. They also forecast interest rates to rise to 5.5 per cent, with an average of 4 per cent over the first three years.

A disruptive Brexit, i.e. a ‘difficult' one rather than no deal, is forecasted to have a 4.25 per cent inflation impact plus 14 per cent downside property risk.

A 4.25 - 6.5 per cent rise in inflation, coupled with soaring interest rates, is going to slam the pocket of the householder, and obliterate their spending power, causing carnage on the retail high street and elsewhere.

Personally, I don't believe they could create such a self-induced famine, and as I've intimated all along, I wondered if they would ever Brexit at all.

Sick to death with that B word, markets would support and sigh a relief for anything other than a hard or disruptive Brexit.

Bubbles and crashes are created by sentiment remember.

Supporting house prices is the nervousness that Brexit creates. As a house builder, worrying that the asset you build may offer you no return, is hardly attractive.

Faced with that, or indeed the inability to even liquidate (sell) the asset, squeezes new properties coming onto the market, and in turn, supports prices due to lack of demand.

London has the greater impact, which washes into the UK figures overall. Due to the potential impact on the city and to the financial district, people are worried about their jobs and so have held off making decisions potentially creating a self-fulfilling prophecy.

It's easy to argue that house prices are overinflated there and as such house prices across the remainder of the UK would be less impacted.

The counter to all of this is that house prices across the UK have remained reasonably robust in the UK since the vote, but as we don't need reminding, the UK hasn't Brexited yet, and it's in the balance if they ever will.

Supporting the market now is the influx of foreign purchasers snapping up UK property at a discount relative to their currency due to the impact of Brexit on Sterling.

Nearly three times as many £10m plus homes were sold in the year after the vote as before – ironically, for those opposing immigration!

:: Peter McGahan is chief executive of independent financial adviser Worldwide Financial Planning, which is authorised and regulated by the Financial Conduct Authority. For advice on the best mortgage rates, please call Darren McKeever on 028 6863 2692, email info@wwfp.net or visit us on www.wwfp.net.

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