Since last Friday’s Referendum result, the topic of the UK’s departure from the European Union has reverberated around the world. The BSA discusses potential effects.
There has been a lot of conversation, speculation and expectation regarding the future of the UK after the nation voted to leave the European Union last week.
It is difficult to predict precisely what will happen in the coming weeks and months. A new Prime Minister is imminent, by 9 September, and notice of the UK’s departure under Article 50 is yet to be given to the EU. There is even the constitutional question of who can give this notice - the Prime Minister; the Government or wil it actually require an Act of Parliament?
However, one thing that we do know is that leaving the EU will be a long and slow process. It will take around two years once notice is served, perhaps even longer if all member states agree.
There is therefore plenty of time to prepare, and we are unlikely to see any immediate change to the way we do business, though as anticipated there has been some - hopefully short-term - market reaction. So how do we see the position in key topics of importance to building societies and their customers?
Mortgages and Housing
People still need somewhere to live, therefore the requirement to buy, sell or rent property remains, irrespective of last Friday’s result. Mortgages are available and the same approach to assessing affordability continues to apply.
There may be blips in demand if consumer confidence means they delay making decisions to buy or move, but so far there is little evidence of consumers in the throes of buying changing their minds.
The performance of the housing market is likely to reflect developments in the wider economy, and the market is sensitive to a number of local variations, not just the UK’s position in the EU.
It is difficult to say how house prices will be affected. Prices are primarily a function of supply and demand and in many areas of the UK we don’t have enough homes, so prices are likely to be supported until that balance is addressed.
If there is an adverse economic reaction which results in a fall in spending into the economy, demand for home buying could reduce temporarily and there could be some downward pressure on house prices.
Conversely, if there is no significant longer term reaction, then if uncertainty was a factor dissuading buyers in the run up to the Referendum, they may feel more confident to enter the market, potentially supporting prices in areas where supply is limited.
With regards to speculation about EU citizens potentially leaving the UK after the result, causing property prices to drop, it is far from certain that there will ultimately be a net reduction in the population of the UK. What happens to the two-million UK citizens living in other EU countries, for example, will be part of the negotiations once Article 50 is triggered and the two-year clock starts to count down. Immigration from non-EU countries is also a significant factor.
The majority of the money lent for home purchase by building societies comes from retail savers, not wholesale markets. For societies 80% of the money that they lend comes from this source.
Various reforms introduced after the financial crisis have improved banks’ and building societies’ resilience. Banks and building societies now hold more, and better quality, capital and liquidity and for mortgages the supply side is strong.
Though some are worrying about the Bank Base Rate going up, most commentators see the next move in rates as down – potentially to 0% by the end of the year. This is tough to accurately predict, and will depend on a number of factors.
The Monetary Policy Committee is focused on the outlook for inflation, so theoretically the base rate could be cut (or Quantative Easing expanded) if there is a sharp fall in confidence and spending. OR it could rise if for example the Committee decided they needed to react to manage higher inflation due to a fall in the value of Sterling.
One fact worth bering in mind is that around 80% of new lending is currently at fixed rates and around half of all outstanding mortgage loans are on this basis delivering a cushion of certainty to consumers.
Mortgage rates are historically low - we have seen our first sub 1% mortgage - and have fluctuated regardless of the Base Rate in the past few years. If it rises now it is likely mortgage rates will go up to some degree. If it stays as it is or falls, we anticipate that rates for new mortgages will still vary, as they should in a competitive market. Rates also reflect changes in funding costs, appetite to lend, changes in competitors’ rates, and so on. We are not in a tide comes in (or goes out) and all boats rise (or fall) situation.
Savings are just as safe today as they were before last Friday’s result. The Financial Services Compensation Scheme will continue to operate as it has done for years and protect the same level of savings as it has done since December last year - £75,000 cover for sole named accounts and £150,000 for joint accounts. Interest rates have continued to move on individual products since the Bank Base Rate changed to 0.5% in 2009. Variable rates are affected by many factors including things such as competitor rates and the liquidity level and lending appetite of individual institutions.
Legislation and regulation
It is highly unlikely we will see much, if any, change in the regulatory environment in the short term. EU Directives, including the recent Mortgage Credit Directive, are now enshrined in UK law and regulation. Stability of regulation is now as, if not more, important.
It is uncertain after the UK actually exits the EU whether changing UK law/regulation will be a priority in financial services, it is something that should be on the mind of the new negotiating team set up under Oliver Letwin in the Cabinet Office.
Technically, EU Regulations which are directly enshrined in EU Law will fall away when the UK exits the EU, unless there are transitional/saving provisions in UK law. These regulations include the Capital Requirements Regulation; Market Abuse Regulation and the International Accounting Standards Regulation.
In practice it is likely that some temporary fixes will be needed while the longer term landscape is reassessed.
Plusthe UK will remain subject to EU rules and regulations for at least a further two years while the legal process around exit is completed.
During this period, any Regulations that the EU passes will we anticipate become directly effective EU law and apply to the UK whilst it remains a member. It is less certain what would happen in relation to new EU Directives or those not yet implemented, as Directives require implementation by individual EU member states.
Clearly for the UK to be required to implement new EU Directives– that may only be in force for a very limited time would be the worst of all worlds. This will be a matter for the UK Government to discuss and agree with the relevant authorities within the EU as part of the exist negotiation.
So we are the start of an adventure. One that will doubtless have many twists and turns along the way. This journey needs a Government and an Opposition that are strong, effective and united within party lines at least. There are unknowns – after all no one has ever done this before. However, if we all hold our nerve and look forward it can be done.