The Price of Brexit: Cheap Money and Expensive Houses
So the Bank of England has dropped interest rates to a historic 0.25% in an attempt to stave off the Brexit-based recession that appears to be lurking just round the corner in Q3 of 2016. This has dealt another blow to the value of Sterling, which has already been hit in the immediate aftermath of Brexit.
Initial reports suggested that foreign investment in UK property would be put off by the uncertainty of Brexit (Williams-Grut, 2016) .
However, the ongoing devaluation of Sterling has given the foreign market a 20% price cut on their investments. The Telegraph has reported a 40% spike in enquiries into UK property on the Chinese equivalent of Zoopla which demonstrates how appealing the environment is to foreign investors (Fraser, 2016).
So whilst the Base Rate cut has had a beneficial impact on foreign investors by devaluing Sterling, it will have little impact on the domestic market. On the whole, domestic mortgages will be unlikely to be significantly affected. Although the 0.25% cut may, in some cases, be passed on, the margins in this sector are tight, so there is little appetite to compete for this type of lending. Less competition means that rates will remain largely the same.
Contrast this to the fact that big banks were already scrambling to drop their interest rates on buy-to-let mortgages to try to tempt wary landlords into making that difficult decision to continue to invest Post-Brexit. The banks are keen to retain the flow of money on these products which typically have higher margin than domestic products and therefore make the banks more money. As Bob Young, Chief Executive at buy-to-let mortgage lender Fleet Mortgages, said: 'Quite simply, it’s a lack of business that is driving down rates (Davidson, 2016)
So, what will be the impact of Brexit + Base Rate cut? It will be a pincer movement similar to that experienced in 2009 where foreign buyers and Buy-to-Let landlords swept through the residential market buying up the best deals by offering quicker completions and cash deals. This condenses the remaining domestic (mortgage-reliant) buyers into an increasingly competitive market and I predict a return of queues around the block and sealed envelopes at viewing days before the start of 2018. So the true price of Brexit; Cheap money for those who can afford it, and a reduced marketplace for domestic buyers resulting in an extended housing bubble.
Fraser, Isabella. The Telegraph (25th July 2016) Source: http://www.telegraph.co.uk/property/house-prices/huge-spike-in-chinese-property-investors-interest-in-the-uk-post/, Accessed: 12th August 2016
Davidson, Sarah, This Is Money (23rd June 2016) Source: http://www.thisismoney.co.uk/money/buytolet/article-3656147/Buy-let-mortgage-rates-fall-Brexit-fears-stamp-duty-hangover.html, Accessed: 12th August 2016
Williams-Grut, Oscar, UK Business Insider (1st July 2016) Source: http://uk.businessinsider.com/eu-referendum-brexit-fallout-singapore-lender-stops-offering-london-mortgages-2016-7, Accessed: 12th August 2016