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IMF predicts lower UK growth ahead of Brexit

The International Monetary Fund (IMF) has said the UK economy will grow by 1.5 per cent this year and next if there is a Brexit deal, in its latest assessment of the UK’s economic health.

The organisation said growth has been about 1.75 per cent in the two years since the UK voted to leave the European Union, moving the country from the top of the G7 growth tables to near the bottom.

The 1.5 per cent growth forecast matters to advisers because this is the figure Andy Haldane, the Bank of England’s chief economist, has said this the minimum level at which the central bank would begin putting interest rates up.

Mr Haldane regards 1.5 per cent as the trend, or normal, level of economic growth for the UK economy and at this level inflationary pressure should be muted. The two other conditions Mr Haldane said would need to be met for interest rates to rise were inflation above 2 per cent and real wage growth in the economy.

The IMF said there was limited scope for the UK economy to grow sharply if a Brexit deal was agreed because unemployment was already very low, as was the savings rate.

That data indicated, according to the IMF, the UK was already at close to its full potential.

Mr Haldane has said the reason the economy had not performed as the Bank of England had predicted since Brexit was that the change to the economy since the vote has been a “supply shock”, that is the supply of goods and services in the economy had become more expensive, rather than a “demand shock”, which is what happens when consumers and customers buy less.

A supply shock has a negative effect on the economy over the long-term, but the impact is gradual in each individual year so less noticeable to voters than a demand shock, which has an immediate and negative impact leading to lower domestic demand and higher unemployment in the shorter term.

The IMF said a no-deal Brexit would have “substantial costs” for the UK economy and the Bank of England’s stress tests projected the UK economy would have a situation impact to, but not worse than, the credit crunch of a decade ago.

Analysts at the Economist Intelligence Unit said they expected the UK economy to have slower growth next year than this, regardless of the outcome of the Brexit negotiations, due to the cloud of uncertainty which the negotiations had left hanging over the economy.

Jonathan Davis, an adviser at Jonathan Davis Wealth Management in Hertford, said Brexit was not part of his investment thinking.

Source: FT Adviser

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IMF concerned about overvalued UK house prices

The International Monetary Fund (IMF) has issued an extremely concerning report on the worldwide housing market. The IMF believes that house prices in some of the world’s largest economies could be overvalued by an average of 12%. When you consider the average price of a UK property this equates to a potential “overvaluation” of almost £30,000. What is causing these concerns and will the market collapse?

AVERAGE UK PROPERTY PRICE

The average UK home is now valued in the region of £230,000 with a 12% reduction equating to around £27,600. This is slightly over the average UK annual salary to put this into perspective. At this moment in time growth in property prices in the UK has slowed and London has actually moved into negative territory. However, it is worth highlighting the fact that UK house prices are still increasing although at a much reduced rate due to Brexit concerns.

CHEAP FINANCE

Since the 2007 US sub-prime mortgage crash, worldwide interest rates have remained at near historically low levels. This in itself has made cheap funding available for financial institutions, to revive economies, leading to relatively cheap mortgages. Even though the Bank of England recently increased UK interest rates they are unlikely to move to anywhere near historic average levels any time soon. So, concerns about cheap finance will likely continue for some time to come.

GOVERNMENT SCHEMES

The UK government’s Help to Buy scheme has been well received, allowing many people to finally climb onto the property ladder. The problem is that these schemes generally make housing available to those who would not normally be able to afford these properties. The consequence is that the increased demand, which cannot last forever, pushes prices higher and higher. Once the government’s Help to Buy scheme ends, the extra premium forced onto house prices will push them even further out of the range of future first-time buyers.

RENT CONTROLS

Interestingly, the IMF spoke in great depth about rent controls, something which the Labour government has been touting. The IMF believes that any form of rent control will lead to an increase in property prices, creating a lock in effect that sees many renters in accommodation which exceeds their needs.

This would be a little ironic, assistance for tenants from a future Labour government actually playing into the hands of property investors by pushing the value of their assets higher. In many ways, a degree of rent control takes away the uncertainty of the unknown. In any investment market, secure cash flow is the key and rent controls would reduce the risk/reward ratio and potentially push house prices higher.

CONCLUSION

It depends which experts you speak to as to whether they believe the UK property market is undervalued, fair value or overvalued. The fact is that the market dictates the price, based on supply and demand, although cheap finance and government assistance continue to have a major impact. The suggestion that UK house prices could be overvalued to the tune of 12% is alarming but no government could ever allow house prices to fall by that amount. They would simply be voted out of power!

As a consequence, in a worst-case scenario we may well see a slow deflation of the UK house price bubble (assuming there is an actual bubble). The problem is, with interest rates so low, finance so cheap and minimal bank deposit returns, many investors will again turn to property.

Source: Property Forum