Britain leaving the European Union — known as a Brexit — will not only kill property prices, it will also drag the UK banking sector down with it, say analysts at research house Bernstein.
While Britain’s Chancellor George Osborne already warned in May that a Brexit would make house prices crash by 10% to 18%, Mark Burrows and his team at Bernstein say it would be much worse. In fact, they think that property prices could crash by as much as 30% — that’s nearly double the upper estimate from the Chancellor.
Furthermore, Burrows and his team have painted a rather bleak picture of how a Brexit will affect the economy, following the knock-on effect from house prices falling (emphasis ours):
The UK is obsessed with house prices. House prices down = Consumer Confidence down = Bank stocks down. Right now, each and every negative in the country is being blamed on Brexit. An exit is not in our base case but as we have mentioned in the past, if it were to happen, we wouldn’t be surprised to see house prices down 20-30%.
After all, the market was propped up by foreign investors and given 1) Sterling is predicted to fall in the 20% range and 2) volatility is likely to remain for at least a year post-event, it’s unlikely that there will be a bid on an asset class that is already overheated. BUT even if we were to get Bremain, it’s not really a cause for celebration.
UK bank investors would be wise to get out if there were to be a pop given the housing market has not one but a motley collection of headwinds going against it for the next two years.
The biggest reason for property prices having a huge effect on banking stocks is pretty simple. If there is a property market crash that means the institutions that lend people money to buy a home — the banks — will be hit. Bernstein analysts point out the exposure Britain’s biggest banks have to the mortgage market:
The average house price in Britain is currently at £292,000 ($422,099), according to the latest data from the Office for National Statistics for March. Meanwhile, the average price to buy a home in London is now more than £550,000. Properties in London are now almost 60% more costly than they were prior to the 2008 financial crisis.
On Thursday, the Royal Institution of Chartered Surveyors warned that Britain’s property prices are going to fall for the first time since 2012, and London’s house prices will be affected the most.
However, RICS’ chief economist Simon Rubinsohn said that “there is not at this point a sense that a fundamental shift is taking place in the market,” which shows how property prices are likely to experience a flash crash — a short-term burst of cratering prices.
Britons vote on whether the UK should remain or leave the EU on June 23.