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The Ramifications of Brexit for Landlords

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Uncertainty causes detrimental effects in most industry sectors and it is undoubtedly a concern for landlords operating in the private rented sector. Given that the UK has now committed itself to leaving the European Union, one might have been forgiven for thinking that certainty had been established.

In the immediate aftermath of the referendum, however, few certainties have come to the fore. Partly created by the political vacuum in government following Prime Minister David Cameron's announcement that he would depart office, there are many uncertainties for the new incumbent to deal with.

Chief among these for letting agents and landlords operating in university cities all over the UK will be how changes to freedom of movement impact on student populations. Will Brexit lead to the departure of university exchange programmes, such as the much vaunted Erasmus one, for example? In addition, will there be a financial brake on students committing themselves to study programmes? Landlords in any market will also be keeping a keen eye on their financial positions, notably the relationship between the pound and the world's other major currencies. However, for the time being probably the single most important figure landlords will be checking is the Bank of England interest rate. Let's look at some of the short-terms ramifications that Brexit has already caused and attempt to view the likely scenarios for the private rented sector as negotiations for Brexit begin.

In the immediate few days after the referendum, the Bank of England announced that it was ready with its two principle weapons to boost the economy. The governor, Mark Carney, announced amid a weakening pound that he was ready to introduce £150 billion worth of money into the country's economy to improve market activity and to strengthen investment decisions. He also issued warnings over the vulnerability of households which are running with high levels of debt. Crucially, Carney went to say that a potential economic slowdown in the face of Brexit could cause disruption in the buy-to-let market. [1] As a result of these problems the Bank cut its funding rules for banks. The measure means that the capital required to be held on banks’ balance sheets is reduced by £5.7 billion. Carney's idea is that, as a result, lenders will instantly be able to lend up to £150 billion into the market that they would not otherwise have been able to. Furthermore, the capital buffer rate of interest has been cut to zero from it previous position of 0.5 per cent. However, further cuts seem impossible given this remarkable and historic low.

With swift measures taken to shore up the economy as a whole – and the lending rate for the buy-to-let and owner-occupier markets in particular – you might think it is business as usual for landlords. Nonetheless, there are already some signs of a weakening in house prices. [2] Although it is far too early to say whether this micro trend will turn into a full slump, some landlords will be keeping their eyes fixed on average house prices for the next few months, especially where local trends might exacerbate national ones.

The next economic woe that may push the UK's economy into a tailspin is whether or not membership of the common market or EEA is possible. Membership of an economic union, whilst departing from a political one, may be the favoured route for some in the negotiating camp. [3] However, even with many political leaders calling for it, there is still no certainty that the UK will continue to be a member, especially if the EU says that freedom of movement continues to be non-negotiable. Of course, the UK's economy could do better outside of a European economic agreement, but few think this would happen in the short term, if at all.

Then there is the implication of freedom of movement for EU nationals who come to the UK to study and work. Many of the visitors to these shores from EU countries settle permanently, but others are here for a few years only and rely on the private rented sector for their housing needs. Without this group of people accessing HMOs and private accommodation in great numbers, demand for rented housing could fall, thereby putting a negative pressure on landlords' rental prices. Coupled with negative growth in house prices, this might mean some landlords opt to get out of the market all together. Nevertheless, it should be stressed that both conditions are far from certain at the moment. Who knows? A weakened pound may make the UK's property market see a boom, if overseas investors view it as the chance to get investing while their currency has more buying power. [4]

All of which brings us back to the beginning of this article. It is simply too early to say what is certain and what is not. For landlords, as for many other sectors of the economy, it is a time to wait and see.