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No deal Brexit would cause pound to crash, say Bank of England

The Bank of England has warned the pound would crash, inflation soar, interest rates would have to rise and Britain’s growth would plummet in the event of a no deal disorderly Brexit.

The apocalyptic outcome, contained in the Bank’s analysis of various EU withdrawal scenarios, would also see unemployment skyrocket.

In the event of a disorderly no deal, no transition Brexit, Britain’s GDP could fall by 8%, according to a worst case scenario analysis by the Bank.

The unemployment rate would rise 7.5%, inflation would surge to 6.5% while interest rates would rise as high as 5.5%.

House prices are forecast to decline 30%, while commercial property prices are set to fall 48%. The pound would fall by 25% to less than parity against both the US dollar and the euro, according to the bombshell report.

Prime Minister Theresa May is aiming to convince sceptical MPs to back her EU withdrawal agreement she reached with Brussels. Parliament is set to vote on the deal on December 11 and if the deal is not approved it will see the UK lose the transition period.

The Bank’s doomsday analysis comes hours after the Government released its own impact assessment, which found that withdrawal from the EU under Theresa May’s plans could cut the UK’s GDP by up to 3.9% over the next 15 years.

But leaving without a deal could deliver a 9.3% hit to GDP over the same period, said the analysis produced by departments across Whitehall. And the UK will be poorer in economic terms under any version of Brexit, compared with staying in the EU.

The Bank of England added that in the event of a disruptive Brexit, where there is no change to border trade or financial markets, GDP may fall 3% from its level in the first quarter in 2019.

In this scenario, the unemployment rate will hit 5.75% and inflation rises to 4.25%.

House prices decline 14% and commercial property prices fall 27%. The pound would fall by 15% against the US dollar to 1.10.

However, major British banks have “levels of capital and liquidity to withstand even a severe economic shock that could be associated with a disorderly Brexit”, the Bank concluded from tests of banks’ financial resilience.

Britain’s banking system is “strong enough to continue to serve UK households and businesses even in the event of a disorderly Brexit”, the Bank said.

Source: iTV

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Brokers see fall in mortgage business

Mortgage brokers have seen the biggest drop in business volumes in more than two years, according to the latest Mortgage Market Tracker from the Intermediary Mortgage Lenders Association (IMLA).

The average number of cases brokers handle on an annual basis dropped by 10% in Q3 2018, from 90 to 81 cases. This is the largest quarterly drop since Q1 2016, when annual average cases fell 11% (82 to 72 cases) in Q1 2016 (Chart 1).

For the first time since 2016, the percentage of brokers who professed to be “very confident” about their own business’ fell, from 68% to 60%.

The drop in mortgage broker activity reflects the drop in the number of mortgage purchase completions on a year-on-year basis. According to UK Finance statistics, the number of first-time buyer, homemovers and buy-to-let investors in Q3 2018 all fell compared to a year ago (Table 1).

Table 1: Number of loans completed, quarterly

Type of loan Number of loans Q3 2017 Number of loans Q2 2018 Number of loans Q3 2018 Percentage change YoY
FTB   96,700 92,900 96,200 -0.5%
Homemover
104,900
89,200 100,000 -4.7%
Remortgage
111,100
113,800 120,800 8.7%
BTL
19,700
15,900 16,700 -15.3%
BTL Remortgage
39,300
41,400 40,800 3.8%

Source: UK Finance

Conversely, remortgage activity continues to remain strong. Quarterly figures for residential remortgages were up more than 6%, annual remortgage activity for both residential and BTL loans grew compared with Q3 2017.

Separate IMLA research also suggests that fewer brokers are feeling positive about the mortgage market in 2018.  In H1 2018, a third of brokers (33%) felt the current market would “improve a little” but by H2 2018 that had fallen to just a fifth of brokers (20%).

The quarterly IMLA Mortgage Market Tracker – which uses data from BVA BDRC– found that for those who move forward with a property transaction, the market continues to work well with nearly nine in 10 (88%) of all mortgage applications via intermediaries leading to offers.

Kate Davies, executive director of IMLA, commented: “These latest survey results show that sentiment among buyers and movers is currently at a low point.  Whilst the Brexit negotiations remain so complex and uncertain, many people may be adopting a ‘wait and see’ approach before moving forward with a property purchase.

“While the national uncertainty doesn’t help the prospects of our mortgage brokers, it’s encouraging to see that when an intermediary does apply for a loan on their client’s behalf, they are being accepted. Mortgages going from application to offer remain at more than two-year highs as intermediary lenders continue to find solutions for clients.”

Source: Mortgage Finance Gazette

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Housing market unaffected by Brexit

The impact of Brexit on the UK housing market has been limited, with no imminent fall in prices and market activity according to the Hometracker index.

The Hometracker UK Cities House Price Index for October showed house price inflation was currently sitting at 3.2 per cent annually, with an average price of £255,200.

Both of these figures represented increases since the summer, with inflation rising from 2.4 per cent and average price increasing from £253,900.

Of the 20 cities listed in the index, six were registering inflation above 6 per cent including Leicester at 7.7 per cent, Edinburgh at 7.4 per cent and Manchester at 6.3 per cent.

House price inflation in London continued to slow, with prices falling by 0.4 per cent, but Hometrack analysis suggested Brexit had merely been a “compounding factor” in this slowdown and other market fundamentals were responsible for the slump.

Hometrack pointed to affordability, tax changes and mortgage regulation as the main drivers of London’s stagnating growth and market activity, factors it said aligned with the timing of the Brexit vote.

Kevin Roberts, director at Legal & General Mortgage Club, said: “House prices continue to rise at more sustainable rates across the country, but strong economic hubs and good transport links continue to provide first-time buyers and growing families with better value for money in the north of England.

But Mr Roberts warned the housing crisis was not yet over, with affordability issues and saving for a deposit remaining one of the largest barriers to homeownership.

He said: “The good news is that there is more choice than ever before in the mortgage market.

“With a growing number of lenders offering lower deposit mortgages, now is the time for borrowers to speak to a mortgage adviser who can help them find a mortgage to get them onto and up the housing ladder.”

Steve Seal, director of sales and marketing at Bluestone Mortgages, said while there were strong regional differences, overall house prices were continuing to creep up.

He said: “We cannot forget that many buyers are left disillusioned with a market that is failing to accommodate their needs.

“For those who cannot meet the rigid criteria of high-street lenders, for example self-employed workers, contractors or those who have suffered a financial bump, more needs to be done to ensure these borrowers are given an equal opportunity.

“As an industry, we should cater for the whole market and guide the underserved up the property ladder.”

Source: FT Adviser

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Buy-to-let masterclass: how to spot the next property hotspot

In the latest instalment of his buy-to-let masterclass series, property expert and presenter of The Property Podcast Rob Bence looks at how to find the next property hotspot.

With 2018 drawing to a close, property investors will be looking ahead to the next 12 months and considering their next investment.

But how do you go about choosing a location? For most investors there’ll be mitigating factors that will influence the decision.

Some like to buy properties near to where they live, for example.

Others will be swayed by the type of property they’re after, which will then determine where to look.

For those willing to take a punt on a new and upcoming area, there can be big rewards and the simplest way to identify these areas is by using a technique we call ‘the ripple effect’.

It’s a very simple and, in some ways, obvious tactic.

Spotting the first ripple

When property in one area starts to become more expensive, those people who would have traditionally bought in that area are priced out and have to start looking a little further afield.

They’ll buy a property in a nearby location (so the original spot is still accessible) and this second area will, in turn, start to see price growth as a result.

That means the people who would have bought in this second area are also priced out and have to move a little further out and so on and so on.

So that initial price growth in the first area causes a ripple effect that spreads much wider.

The most obvious example of this is London. Following the economic crash in 2008, the London property market was brought to its knees.

Prices fell significantly.

However, overseas investors who saw London as a safe haven for their money quickly began to snap up prime London properties, pushing would-be buyers further out.

This ripple effect continued until almost all of the South East was impacted.

Indeed, in 2016, eight years after the crash, Luton was named the best investor hotspot in the UK by estate agents Jackson-Stops.

Liverpool an intriguing prospect

buy-to-let masterclass

A similar thing is happening in Manchester.

A few years ago the city was not seen as the first choice for property, but millions of pounds of private, public and overseas investment has seen Manchester soar and as a result, the surrounding areas in Greater Manchester have also seen significant price growth.

I predict Liverpool will be next.

Overseas investors currently ploughing money into Manchester will start to look for their next location and Liverpool ticks a lot of the boxes they’ll be looking for.

We’re already seeing development there and I know from speaking with developers that there is a lot more to come.

So how can you identify the ripple effect elsewhere?

How to spot the next big thing

Well, the important thing to remember is that all ripples start with a stone being thrown.

That stone could be a number of things: gentrification is a big one.

Once an area becomes a nice place to live, more businesses move into it, more amenities are created and prices start to rise.

East London is a perfect example of this.

Transport links can also start the ripple effect: a new train station, for example, can see prices increase in areas 10 or 20 miles away.

When an area becomes a ‘commuter’ town prices can soar.

It’s a commonly-used tactic, but it’s not for the faint-hearted. To really make the most of the ripple effect you need to be brave.

You need to get in on an up and coming area before anyone else, before you, too, become priced out.

But, if you’re willing to take the plunge, it can reap huge rewards.

Source: Love Money

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How a no deal Brexit will affect UK growth

Depending on how Brexit goes 2019 could see UK growth accelerate or almost grind to a halt. So, say two forecasting groups which have modelled the economic effects of the UK’s exit from the EU.

The UK’s National Institute of Economic and Social Research (NIESR) and the Organisation of Economic Cooperation and Development (OECD) have come to broadly similar conclusions. They estimate that with a deal and a transition UK GDP growth would average around 1.6% in 2019 and 2020. This would represent a modest acceleration from growth of roughly 1.3% this year. The expectation is that with Brexit risk reduced, activity, especially business investment, would bounce back.

Without a deal the NIESR and the OECD estimate UK growth would slow sharply, with the economy expanding by an average of about 0.4% over 2019 and 2020. This points to near stagnation in activity – though not a severe or protracted recession.

All forecasts need to be taken with a large pinch of salt. It is difficult to estimate how fast the economy grew in the previous quarter – let alone forecast what it will look like in one or two years’ time. Forecasts are fallible, and the longer term the forecast the more fallible it is.

Yet they are a worthwhile starting point for thinking about the future. Forecasts provide a structured way of assessing how a multitude of factors could combine to influence growth. The output – a GDP forecast – is a condensed summary of a complex view of the world.

There is no precedent for a no-deal exit from the EU. But past events – from the EU referendum in 2016 to the disruption of the three day week in 1974 and the euro debt crisis – offer clues.

A no deal exit might be expected to affect growth through three main channels. Any weakening in business and consumer confidence would weigh on investment and household spending. A fall in the pound would fuel inflation and squeeze consumer incomes. Regulatory disruption and uncertainty would tend to slow activity, much as the 2000 fuel protect did.

There is less concern today than in 2016 that a no deal exit might trigger a renewed credit crunch. Financial markets seem to think that the banks are well positioned to cope with such an eventuality. Last week the governor of the Bank of England, Mark Carney, noted that even when the risks of a no deal exit rise there is no rise in the cost of borrowing for banks.

The profile of UK growth in the coming months could become choppier as firms and consumers seek to insulate themselves against the risk of disruption by building stockpiles.

In its latest edition, The Economist announced that it is stockpiling around 30 tonnes of the paper for its UK print edition. Last week Majestic Wine said it would increase UK stock levels by up to 1.5 million bottles of wine. UK food retailers are also reported to have considered building stocks, though limited storage capacity, especially for fresh food, make this difficult.

Increased stockpiling adds to current activity at the expense of reducing future growth (In GDP terms it represents growth brought forward). The effects on quarterly GDP growth can be significant, making it harder to assess the underlying momentum of growth.

The official independent forecaster, the Office for Budget Responsibility (OBR), argues that if supply bottlenecks were to persist after Brexit output could decline significantly. The OBR drew comparisons with the introduction of an emergency three day working week in early 1974. It was made necessary by a miners’ strike which disrupted energy supplies and made full-time working impossible. Short time working contributed to a near 3% fall in quarterly output.

So how might the authorities respond to a no-deal exit? The Chancellor, Philip Hammond, has hinted at the need for a special Budget in such circumstances. It might seek to counter any immediate knock to growth by boosting public spending and cutting taxes.

Mr Carney has suggested that the Bank of England would be inclined to see a no-deal Brexit as a supply shock which would exacerbate bottlenecks and increase inflation risks. As such, the appropriate response, Mr Carney said last week, would be to raise interest rates.

Whether, faced with a sharp slowdown in growth, the Bank would follow through on this remains to be seen. Raising rates in the wake of a no deal exit would be politically controversial and economically contestable. Financial markets take the view that if the UK leaves without a deal the chances are that interest rates will be cut, not raised.

Finally, it’s worth noting that Brexit will be a major, but not the only factor, influencing UK growth in the next couple of years. The external environment, financial conditions and the unfolding path of the domestic economic cycle matter too.

PS: There has been a remarkable turnaround in the number of manufacturing jobs in the US. The number of American manufacturing jobs fell by 60% from the turn of the century to 2010. Since then, it has risen by 11%. While President Trump made the on shoring of manufacturing jobs part of his 2016 election campaign pledge, a modest revival in manufacturing may have already been well underway.

Source: Reaction

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Third of Brits don’t save enough for a month’s rent

A third of Brits do not have enough savings to cover a month’s rent in the event they lost their job, despite many earning above £75,000 a year, research has found.

According to a survey of 2,002 UK adults carried out by Innovative Finance Isa provider Oaksmore, 30 per cent of those surveyed said they could not afford a month’s rent if they lost their job, even though one in 10 was earning more than £75,000 a year.

A mere 38 per cent admitted to having money in a current account, the provider said.

According to the study 55 per cent had never attempted to earn greater interest on their savings by investing in a form of Isa, while 1 in 5 said they were not aware of the earning potential of investing in cash Isas. About a third (28 per cent) said moving money into a cash Isa was not a priority for them.

Reuben Skelton, director at Oaksmore, said: “Sometimes it feels like money leaves the bank account just as soon as it comes in, but it’s so important to get into good saving habits to put a fund aside for emergencies.

“Investing money into schemes with strong returns is a great way of topping up salaries and the interest alone can form the foundations of an excellent emergency fund to help workers stay out of financial difficulty should the find themselves out of a job.”

Calum Bennie, savings specialist at Scottish Friendly, said he believes Brits are scared of investing in anything else other than cash.

He said: “Attitude to risk is a personal thing and ultimately you shouldn’t feel uncomfortable about where you’ve put your money.

“Investing doesn’t have to be scary, or complicated, or only for the wealthy. It’s for everyone.”

Oaksmore offers an Innovative Finance Isa that allows public investors to support heritage projects across the UK.

Ifisas allow savers to invest in FCA-regulated peer-to-peer lending platforms and other alternative investments while using their annual Isa investment allowance to receive interest and capital gains tax free.

Source: FT Adviser

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House purchase mortgage approvals hit a three-month high

Home buyers have received some long-awaited good news as mortgage approvals for house purchase increased for the first time in three months, banks claim – but are they being driven by the return of 100% deposit “supersized mortgages?”

Lending data from trade body UK Finance shows mortgage approvals for house purchase were up 3.6% annually and 21.2% on a monthly basis to 45,289 during October.

Lending to home buyers had been falling since July 2018 and hit a six-month low in September.

The boost seems to have come at the expense of remortgaging, with approvals in this area down 13.5% year-on-year to 33,505.

The value of gross mortgage lending across the market in October was up 5.6% to £25.5bn.

It comes amid reports of the return of controversial “supersized mortgages,” which require little or no deposit and were seen as a cause of the 2008 financial crisis.

Comparison website Moneyfacts lists 16 different 100% loan-to-value mortgages that don’t require any deposit but do need a guarantor, which is usually a family member or a charge placed on another property or someone’s savings.

Bank of England data shows that a quarter of mortgages are now for 4.5 times someone’s salary or higher, compared with a fifth just three years ago.

Debt charities and mortgage brokers have warned it is important that borrowers aren’t stretched too far.

However, UK Finance doesn’t seem concerned.

A spokesman told the Daily Mail: “High loan-to-income mortgages are only likely to be available to those who have good prospects for wage increases, such as those in certain professional roles.

“Before they are able to offer any mortgage, lenders must undertake a strict affordability assessment in accordance with the rules outlined by the regulator.”

Source: Property Industry Eye

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Limited company buy-to-let has changed the market

I wrote in an earlier post that buy-to-let was evolving at a pace and that the rush to incorporate so many investor borrowers would inevitably create a different looking market.

And so it has come to pass. According to Mortgages for Business’ Buy to Let Index, the number of buy-to-let lenders lending to limited companies has risen by 47% over the past year. 22 buy-to-let lenders now lend to limited companies – up from 15 in Q3 2017 and the total number of mortgage products available to them has more than doubled since Q3 2017 – from 263 to 628. The result has been that 44% of buy-to-let transactions now made by limited companies – up from 42% in Q2 2018

This change in market behaviour should not surprise us. We are only just over a year from last September’s changes issued by the Prudential Regulation Authority, the 3% stamp duty surcharge on second homes in April 2016 and a withdrawal of tax relief by 2020.

We’ve already seen that the more stringent rules on buy-to-let lending has meant the near two million ‘hobby’ landlords who own 15% of the housing market have found it increasingly difficult to raise finance from traditional lenders but many have also embraced the business model of Houses of Multiple Occupancy in an effort to improve yields unaware of the many more stringent rules that accompany these kinds of dwellings.

Limited company structures do not come without their challenges and costs for all concerned. They not only affect individual borrowers’ tax positions but also demand skills in lenders such as understanding how company structures and law affect lending positions.

Completely new companies have no trading history or track record of success upon which lenders can base their decisions. Without any credit history it’s hard to establish the chances of the loan being repaid. In these circumstances, the lenders that do consider such applications often ask for personal guarantee’s from the directors, so that should the mortgage not be repaid the directors become personally responsible.

There may be additional administrative costs related to operating as a limited company, and in some instances it can be more complicated to transfer property and assets. When a property is sold via a limited company, it is subject to corporation tax, rather than capital gains tax. While the rate of corporation tax is lower than the rate of capital gains tax, an individual benefits from the capital gains tax allowance, which does not apply to a company.

There is the expectation that people borrowing through companies realise there are no blurred lines. A limited company has its own legal personality, which is separate to the individuals who participate in it. Rent the company earns cannot be spent on things other than business activities without these becoming a taxable wage or benefit. Because the extraction of money has to be through salary and dividends that money is subject to rules under the companies act and there is tax to pay for the recipient/shareholder.

It is when things go wrong that expertise is really in demand. A company does not retain the same rights an individual in the law or in practice and these has implications for tenants and landlords. A lender that has lent money to fund the purchase of a borrower’s home may be sympathetic when circumstances cause a borrower to get into mortgage arrears.

Further, the mortgage lender has a regulatory duty to help that borrower address the problem. However, where money has been lent on what is effectively a commercial enterprise, the lender may not be prepared to listen to excuses and may be much quicker to initiate repossession proceedings once a borrower gets into mortgage arrears. In some cases where arrears have built up on a buy-to-let property, the lender may appoint receivers to administer the property and accept any rents being paid.

Clearly, proper management of these loans and the processes for recouping losses in the sector now requires levels of expertise previously not required. From seeing the opportunity to underwriting complicated company structures, lenders need commercial underwriters to assess properly the opportunity to lend and experienced professionals if things do not go according to plan.

Source: Mortgage Introducer

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How is the UK commercial property sector performing?

The UK commercial property market is rapidly changing and facing highly uncertain times in the face of Brexit. We have a look at how the industry is evolving and what commercial property stocks to watch.

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Mortgages approved by high street banks increase in October

The number of mortgages approved by high street banks rose in October from a four-month low in September, but economists said the increase could be a one-off from its downward trend.

House purchase mortgage approvals grew to 39,697 last month from 38,712 in September, according to trade body UK Finance.

However, mortgage approvals declined 1.7% year-on-year from 40,165 last October.

Howard Archer, chief economic adviser at EY Item Club, said: “Mortgage approvals for house purchases have essentially been locked in a 38,000-40,000 range through 2018.

“Consequently, October’s rise to 39,697 does little to change the perception that the housing market is struggling for momentum in the face of still limited consumer purchasing power, fragile consumer confidence and wariness over higher interest rates.”

He added that uncertainty over the UK’s departure from the European Union may also be affecting housing market activity.

Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said: “Uncertainty about Brexit, which we expect to persist well in to the first quarter, given the likelihood that Parliament votes to reject the deal next month, likely will prompt buyers to delay home purchases.

“It is hard to see mortgage approvals recovering materially; either Britain will be in a transition period next year, which will enable the MPC (Monetary Policy Committee) to pick up the pace of interest rate increases, or lenders will be curtailing lending due to a no-deal Brexit.”

Meanwhile, UK finance also said that consumer credit growth was stable at 4% in October, while credit card lending growth remained at 5.7%.

Eric Leenders of UK Finance said: “Households are taking a measured approach to credit, with repayments on credit cards broadly in line with spending.

“This reflects the growing preference of customers to use their credit cards as a means of payment rather than a borrowing mechanism, making the most of additional consumer protections and value-added benefits.”

Source: Shropshire Star