Friday, 13 May 2016

A Brexit vote could send house prices crashing, warns IMF

A vote to leave the EU could send house prices crashing and severely damage the UK economy, the International Monetary Fund has warned.
In its annual report on the British economy, the IMF predicted house prices could plummet and London’s status as a global financial centre could also be eroded.
The report said: “Another risk is that markets may anticipate such adverse economic effects, provoking an abrupt reaction to an exit vote.
“This could entail sharp drops in equity and house prices, increased borrowing costs for households and businesses, and even a sudden stop of investment inflows into key sectors such as commercial real estate and finance.
“The UK’s record-high current account deficit and attendant reliance on external financing exacerbates these risks. Such market reactions could sharply contract economic activity, further depressing asset prices in a self-reinforcing cycle.”
Speaking at a press conference in the Treasury, IMF managing director Christine Lagarde, said: “Depending on what hypotheticals you take, it’s going to be pretty bad to very, very bad.”
Lagarde said that a Brexit vote could pose a significant downside risk and cause interest rates to rise
Commenting on the report, Chancellor George Osborne, said: “The IMF also put to rest the fallacy that has been peddled by those who say Britain will have more money for public services if we are not paying into the EU budget.
“The IMF are very clear today – the hit to growth we could expect from a vote to leave would cost our public finances more than the amount we would gain from no longer contributing to the EU budget. Put simply, the IMF says a vote to leave costs us money.”
The report noted that economic uncertainty surrounding the referendum may already be having an impact on economic activity.
It said: “Such concerns may have already begun to affect UK markets in recent months. In the commercial real estate market, transactions plunged about 40% in the first quarter of 2016. Although the residential real estate market remains buoyant, this may reflect temporary effects due to tax changes, as discussed in more detail below.”
The comments by the IMF about the impact of a Brexit vote follow similar ones made yesterday by the Bank of England.
The Bank warned that leaving the EU could tip Britain into recession, send house prices crashing and force up interest rates.
Mark Carney, the governor of the Bank of England, said that leaving the EU could have “material” consequences for UK growth. He went on to say that this could result in interest rates being raised in order to bring inflation under control.
He said a range of outcomes were possible, including a “technical” recession – defined by two successive quarters of negative growth.
“A vote to leave the EU could have material economic effects – on the exchange rate, on demand and on the economy’s supply potential – that could affect the appropriate setting of monetary policy,” Carney said.
The Bank’s Monetary Policy Committee said that in the event of a Brexit vote it could potentially raise the base rate in order to bring inflation under control.
“The MPC would take whatever action was needed, following the outcome of the referendum, to ensure that inflation expectations remained well anchored and inflation returned to the target over the appropriate horizon.”

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