What will happen to house prices, Sterling and savings?

Ahead of the EU Referendum, Andrew McPhillips, chief economist at Yorkshire Building Society shares his views on how different markets could behave following news of the outcome of the EU vote

What will happen to house prices, Sterling and savings?

House prices

Remain:

In the event of a Remain vote house price growth is likely to slow as the UK is approaching its limit in terms of housing affordability which could reduce demand for properties. That said, the ongoing lack of supply means that prices are unlikely to fall at least in the short-term.

Leave:

If the UK votes to Leave the EU, demand for properties is likely to remain fairly strong as people will still want to own a home. Although demand could fall to some extent, the lack of supply is likely to mean that house prices will continue to grow, albeit at a reduced pace.

That said, if the Bank of England does not cut the Base Rate, wholesale funding costs for lenders could increase, which may lead to reduced availability of credit. This would further reduce demand, which could cause house prices to fall.

London could be hit hardest by a drop in demand as foreign investors are likely to postpone buying properties until the full implications of the decision are clear.

Mortgages

Remain vote:

If the UK votes to Remain in the EU, mortgage rates are likely to stay low for some time to come. The Bank of England Base Rate is likely to stay at 0.5% for longer due to low levels of inflation. Highly competitive market conditions also could mean that mortgage rates fall even further as lenders may continue to vie for customers’ business.

Leave vote:

In the event of a Leave vote, the Bank of England could cut the base rate in an attempt to stabilise the economy. Though this could lead to an increase in inflation due to the depreciation of Sterling, the Bank is likely to be willing to trade that off against trying to maintain economic growth and avoid the risk of increasing unemployment.

That said, even if the base rate is cut, mortgage interest rates may increase. Lenders will need to ensure that they remain profitable as wholesale and retail funding becomes relatively more expensive. This is most easily achieved by increasing borrowing costs.

Savings

Remain:

Interest rates on savings accounts are likely to stay low for some time if the UK votes to Remain, as the Bank of England Base Rate should stay at 0.5% until we start to see some upwards inflationary pressure.

Leave:

Savings rates following a Leave vote could go one of two ways depending on whether the Bank of England chooses to cut the Base Rate and/or increase its quantitative easing funding. If the Bank of England takes those actions, it would put downward pressure on savings rates. Conversely, if these steps aren’t taken, wholesale funding costs could increase for lenders, which could cause banks and building societies to increase rates to attract more depositors.

Foreign exchange

Remain:

If the UK votes to Remain we could potentially see some further increases in the strength of Sterling. However, it has already strengthened somewhat over the past week so we might not see much of a rebound.

Leave:

In the event of a Leave vote, Sterling is likely to fall in the short-term, perhaps significantly as markets are uncertain exactly how to react and price in the risks around the UK’s negotiations for trade agreements following a Brexit.

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