Market Trends July 2016 Brexit Edition
Market Trends July 2016 Brexit Edition is the latest edition of our regular macro-economic review of the developing trends affecting French Mortgages and Italian Mortgages particularly trends likely to affect French Mortgage Rates and Italian Mortgage Rates and trends that might influence the structure of French Mortgage Products and Italian Mortgage Products.
Brexit Overview – Market Trends July 2016 Brexit Edition
The big news this issue has to be Brexit with its multifaceted and largely unknown consequences.
Brexit will not affect everyone equally and the detailed significance of Brexit will be very different depending on negotiations yet to be started and the individual’s status.
This edition will examine Brexit from the perspective of those with or considering taking a French mortgage or an Italian mortgage.
Internationally, the Brexit referendum has already caused instability in the global FX and Equity markets and the instability will probably continue for some time into the future.
As is common with market behaviour, the instability will come and go as the markets digest and evaluate the latest information and this process could take some time until the effects of Brexit just merge into the background of business as usual.
At this point it is very difficult to predict the net effect of Brexit, but instability always throws up excellent trading opportunities so be prepared!
Brexit – Market Instability is Itself Unstable
Market behaviour is far more unstable and irrational than is commonly realised.
We expect to see successive waves of instability as the markets develop a shared understanding of events, which in turn will be replaced by a fresh wave of uncertainty as the shared understanding is challenged.
Mandlebrot’s book “The (Mis)behaviour of Markets” is an excellent starting point if the topic of market instability interests you. The following TED presentation will give you a good, accessible and interesting insight into his perspectives
To put the case as simply as possible we expect to see the markets lurch from one extreme to another until their interest is transferred to the next topic, for example China and its economic prospects.
Undoubtedly Brexit will change some things, but in global terms, probably far less than the Brexit players imagine and any changes will just be absorbed into the new normal.
Brexit – Differential Effects in Different Contexts
Brexit will have different effects on different people, depending on context, and the views of Brexit in France and Italy seem to be very different to the views of the importance of Brexit as viewed from the UK.
Of the conversations I’ve overheard in France and Italy the general sentiment on the street seems to lie between “Who cares what the British do?” and “We’re not going to miss them, they should never have been allowed to join the EU in the first place”.
It is too early to be definitive, but it makes most sense to take a distinct view for the main classes of people with, or considering taking, a French or Italian mortgage because the effects will be completely different for each group.
The groups I’ll consider are:
UK citizens with or considering taking a French or Italian Mortgage
EU citizens with or considering taking a French or Italian Mortgage
Non UK or EU citizens with or considering taking a French or Italian Mortgage
Outside the detailed review for each of these groups there are some general considerations, mainly short term, that will affect everyone, if only as a consequence of market instability and it’s probably best to start with these.
Brexit – General Considerations
The first point to make is that though Brexit is presently dominating the headlines in the UK and Europe it is little more than a little local difficulty in terms of long term economic history. It is certainly a significant event, at least for the UK, but it is hardly of the magnitude of the emergence of Islamist ideology, North Korea’s nuclear programme or global warming.
Brexit may hit global economic growth in the short term, but the effects on the world economy should wash out first, followed by the effects on the EU economy and eventually the effects on the UK economy.
The political instability engendered in the UK will certainly affect the UK for some years, but in some ways it may be cathartic because it could lead to the resolution of a number of latent and festering elements in the UK’s socio-political profile – to follow this in numbers take a look at John Curtice’s ongoing research findings.
The main planes of discontinuity that could be exposed as fractures are:
- Centre Right versus Extreme Right – Remember Brick Lane
- Centre Left versus the Hard Left – Remember Militant Tendency
- Population – Citizens or Subjects
- Inequality – Capital versus Labour
- Secession – Scotland and Northern Ireland
- Social Division – Pitting the Educated Young against the Poorly Educated Old
- City versus Country – Successful Cities versus the Rest
- UK Nationality – The Other Brexit as the best qualified UK citizens with a right to Dual Nationality start to quit the UK
- Legitimacy – Though there was a small majority, of 3.8% of those voting, to leave the majority of the population (stay + non-voting + non-registered) did not vote for Brexit. This is similar to UK election results where the UK Conservative party were elected to government in 2015 with a percentage of just 36.9%. The result is that there many millions of UK citizens have petitioned for the referendum to be re-run on a more democratic basis and this may add further fuel to demand for UK electoral reform.
In short, the opening of the UK Pandora’s Box has let rip all manner of discontents and though the domestic view may be, as the apocryphal headline “Fog in The Channel – Europe Cut Off” has it, the actual result has been to show that the UK is, by many measures, a fundamentally broken society which is far from central to the thoughts of Europeans and the rest of the world.
The immediate economic result has been a downgrading by the credit ratings agencies of the UK Credit Rating.
Brexit – UK citizens with or considering taking a French or Italian Mortgage
For UK citizens with or considering taking a French or Italian Mortgage we think that the likely implications could be a mixture of the following elements:
- European bank mortgage underwriters may apply stricter financial criteria to UK borrowers to accommodate the increased risk the UK economy will perform increasingly poorly into the future with lower wages, lower employment and a weaker currency. The risk of lending to a UK national has just increased.
- Depending on the details of the final exit arrangements imposed by the EU it is possible, and would be perhaps prudent, for UK nationals owning property in the EU to factor in the possibility that they will face visa restrictions similar to those faced by US and other non EU nationals.
- UK nationals intending to retire or move to the EU to work or setup small businesses may find it prudent to delay their plans unless they can avail themselves of dual nationality with an EU country.
- Depending of the future exchange rate of GBP the cost of servicing an EUR denominated mortgage may rise in GBP terms but in our view it would still be prudent to hedge the mortgage position by ensuring the asset is financed in the same currency as the asset is priced in.
Brexit – EU citizens with or considering taking a French or Italian Mortgage
For EU citizens with or considering taking a French or Italian Mortgage the present market uncertainty is likely to be relatively short lived and unlikely to make any medium or long term difference.
Brexit – Non UK or EU citizens with or considering taking a French or Italian Mortgage
For Non UK or EU citizens with or considering taking a French or Italian Mortgage the position is likely to be as for EU citizens and make no discernable medium or long term difference to the availability of French mortgages and Italian mortgages.
Brexit – French Property Market
We don’t expect the overall effect to be very noticeable across the French property market as a whole, though it may have significant local effects in the case of the specific areas which have clusters of UK nationals.
- There may be an increase in defaults and repossessions from UK nationals in the low cost areas where many UK buyers purchase on the margin of their financing ability as they may find difficulty in meeting EUR mortgage repayments if GBP trades at lower levels to the EUR.
- Property, including repossessed property, in the low cost areas may become relatively unsaleable even at lower prices as the low price areas, though popular with UK buyers, are not popular with buyers from other countries or even the French themselves.
- There may be a minority of UK nationals who have brought property in the higher priced, internationally popular, areas who will be forced to sell if GBP sinks. There are likely to be ready international buyers for these properties, but the buyers will drive a very hard bargain because they will recognise the UK nationals as distressed sellers.
Brexit – Italian Property Market
Italy has never been a popular a destination for UK nationals buying at the lower end of the Italian property market and we expect Brexit to be almost irrelevant save for the few individuals who have problems living with a potentially sinking GBP.
Brexit – Business Market
Until the visa and residence terms applying to UK nationals becomes clear we would strongly recommend against an assumption that it will be possible for a UK national to live and run a small business in either France or Italy unless they have entitlement to dual nationality with an EU member country.
Brexit – The Conclusion
The conclusion will be many years away for UK nationals and it may ultimately be impossible to disentangle what part Brexit has had in shaping their eventual future.
For Europe, the conclusion that seems to be emerging is not unlike the scenario described in Exit Voice: The UK has said its piece and resigned, there’s little more to it than that – they won’t be rehired!
For the average European on the street Brexit was no more than internal political manoeuvring for the leadership within the UK Conservative party and as such is of little more relevance than the political manoeuvring in any other small country: The UK has been part of many more interesting things lately!