UK housing mini boom – will it last? Deal or No Deal on Brexit?
Although we’ve had nearly 35 million confirmed cases of the virus worldwide since this pandemic began, it’s the ones in the White House that have led to a deluge of news and speculation. I don’t propose to add to that US soap opera in this note.
House prices – a very British obsession
Transactions were virtually impossible during the lockdown but there’s been a surge since then in activity and prices. London has, for a change, been the weakest area, not helped by the absence of overseas buyers but pent-up demand and the holiday for stamp duty – a tax on the value of homes when they are sold – has led to a boom in activity and prices. Houses with gardens in nice suburbs of major cities have done particularly well, for obvious reasons.
But many forecasters predict doom and gloom when the stamp duty holiday ends at the end of March next year. There have been similar stamp duty holidays in the past, the early 1990s recession and during the Global Financial Crisis. On both occasions the housing market has suffered, and the relevant Chancellor has been forced to introduce new housing stimulus measures. I do not expect Rishi Sunak to repeat the mistakes of his predecessors. He may take the opportunity to revise the system, he should certainly reintroduce the extra allowance for first time buyers, but I don’t expect him to simply to allow the stamp duty holiday to end with a bang. Of course, much will depend on the overall state of the UK economy and that in turn will depend on whether we get a vaccine.
Potential for a rise in mortgage defaults and more cautious lenders
But there’s another important factor. Following Boris Johnson’s dramatic election victory last year, the housing market improved and competition among high loan-to-value (LTV) mortgages intensified. Hundreds of new deals appeared and the rates for these relatively risky loans tumbled. Existing homeowners could trade up to much more expensive homes, and the stage was set for a mini boom. Then the virus struck. Lenders have made hefty provisions on their mortgage books and rates for high LTV have jumped by 1.5% percentage points or more. One leading bank told us that they have exited the market for 85%+ LTV mortgages.
If the ending of the furlough scheme and the second wave of the virus in the UK leads to mass unemployment and bankruptcies, there are likely to be much higher mortgage defaults in the UK, and those bank provisions will be needed and possibly more. Lenders will become even more cautious and the market will suffer.
My guess is that it will turn out to be less severe than feared. Yes, defaults will rise but the world economy has proven to have been remarkably resilient to the virus and, of course, I’m crossing my fingers that we’ll get a vaccine.
Brexit: negotiations not broken despite legal proceedings
A month ago it seemed that the chances of a deal with the EU, already slim had been scuppered by the UK’s decision to publish the Internal Market Bill which, if passed into law, would effectively mean that the government would breach key provisions of the Withdrawal Agreement that they themselves had negotiated and signed. The European Commission was furious and have started legal proceedings against the UK. Yet the mood music for the negotiations has been good, with the Prime Minister meeting the president of the European Commission over the weekend.
There is a good chance the we will get a deal. There is a landing zone for Northern Ireland, for fish and for state aid – the three areas of disagreement. We also think there’ll be a deal for rules of origin – something crucial for the UK car industry – despite reports to the contrary from the BBC. ‘No deal’ is still a risk but the odds favour a deal. The deal itself will be thin – we should get a Free Trade Agreement on goods – so no tariffs but there’ll still be quotas and non-tariff barriers. And there’s very little on services. But it would avoid the acrimony and finger pointing that would follow a ‘no deal’, and politicians on both sides of the Channel, and the Irish Sea, could claim victory.