Long division

Posted on November 3rd, 2016 by admin

On 23rd June, the country was divided by the question of EU membership. Following the vote to leave, the country continues to be split on what Brexit will mean.

While panic has dominated the headlines, political pundits and economists have been reading into every move the economy makes, thrashing out the details and the potential implications. It is in this climate of uncertainty that companies and the housing market are trying to continue business as usual.

In fact, the economy has performed better than expected. GDP has fallen from 0.7 per cent to 0.5 per cent, rather than the predicted 0.3 per cent. The International Monetary Fund has suggested that Britain’s continued growth of 1.8 per cent puts it ahead of the world’s seven largest industrial countries. And as a testament to British industry, Japanese car giant Nissan’s announced on the 27th October that its Sunderland site had been chosen to produce the new models resulting in a massive investment boost.

Admittedly the uncertainty has caused the housing market to fall (the annual pace of growth fell to 5.3% in September from 5.6% in August), but it is still robust, with property experts noting that it represents a ‘levelling out’ of inflated prices rather than any loss of market confidence. Moreover, the Bank of England’s rate cut has kept mortgage rates low and supported consumer spending, which has remained surprisingly high throughout the Brexit aftermath.

So if both the economy and housing spend are slow but sure, then what was all the Brexit fuss about?

The problem is the long-term implications of Britain leaving the EU. Article 50, which will be triggered in March 2017 by Prime Minister Theresa May, gives a two-year timeframe for working out the trade and legal landscape of Britain and Europe. It has been likened to a divorce, with member states negotiating Britain’s entitlement to trade and investment like parents dividing the house and custody of the children.

What seems to be on the table is a hard Brexit, with Britain leaving the single market and either seeking a free-trade deal with the EU (like Canada’s) or relying on trade under normal World Trade Organisation (WTO) terms. Unfortunately most economists agree that this would cause the most damage. Free-trade would mean Britain faces customs and rules-of-origin controls, as well as many non-tariff barriers, especially in services. While WTO trade terms would mean tariffs for key export industries as cars and pharmaceuticals. Interestingly the head of Renault-Nissan requested a promise of compensation for any such tariffs before any further investment in its Sunderland car plant. In addition Civitas estimates that 9.4m jobs rely on trade between the EU and UK (3.6m in the UK and 5.8m in the EU) so the two years of negotiations will be focused on minimising the economic damage for everybody.

Despite the headlines to the contrary, this damage can be limited. Mutual Recognition Agreements are made so countries can acknowledge each other’s quality control assessments and make trade quicker and easier. It would be possible for Britain and Europe to simply draw up a MRA to continue trade.

Meanwhile, Britain’s financial services are concerned about being able to ‘passport’ across the EU. However, an existing agreement, known as MIFID II, enables banks from non-EU member states to access the EU market directly as long as their home regulation is deemed “MIFID equivalent” so it’s possible Britain could continue on this basis.

Finally, English law is highly regarded worldwide for protecting property and business interests, because it is based on legal precedent, and as a consequence the majority of international financial contracts are written in English law anyway. For these reasons, and if handled objectively, trade between the UK and the EU might not look too different from how it does now.

With the likelihood that London will remain a financial powerhouse post-Brexit, the housing market presents great opportunities both for residence and investment. To make the most of these opportunities, contact Property Divas