What if the Euro Breaks up?

by Mark Johnston

Despite some of the various issues being faced by UK economy at the moment, not least the ongoing pressure on household incomes, the housing market has performed reasonably strongly since last year.

However the euro zone crisis rages on, adding materially to the uncertainties surrounding short term economic prospects.

If or when the troubles in the euro could spill over to the UK, this will mean lenders cutting the availability of loans and mortgages. The UK is not immune, particularly with continental banks such asSantander, on the high street.

There has already been evidence from mortgage brokers that banks such asSantanderhave pulled back on their lending in recent weeks.

The turmoil in the financial market at the moment has already increased financing mortgage costs by 40% since the beginning of 2012 and it seems worse may follow if Greece falls on its sword.

Analysts believe that a Greek exit has deep recession for the UK, written all over it.

Howard archer, chief economist at IHS, said that “households would find it even more difficult to get mortgages than they are doing at present”.

The Bank of England has recently warned home owners to ‘brace themselves’ for sharp increases in the cost of their mortgage as a result of the chaos in the euro zone.

According to Adrian Anderson, from mortgage broker Anderson Harris, the crisis now looks to add hundreds of pounds a year to the cost of a typical home loan. He adds “there will be plenty of pressure on lenders to reduce the amount of lending they do, improve margins and raise mortgages rates in coming weeks and that is even before Greece has made any official decision to leave”.

Some economists feel that the cost of a typical home loan could therefore rise from 3.6% to 4.5% if the crisis worsens.

Financial experts therefore believe that with most home owners having to find thousands of pounds extra in the current climate it will push many ‘over the edge’.

Una Farrell, of debt advisers the Consumer Credit Counselling Service (CCCS) agreed with the experts adding that “the margin between being able to pay your mortgage and falling in to arrears is already paper thin for many”.

A euro break up could also see London property prices halved as the world’s wealthy house buyer’s look elsewhere. Property prices in the capital have been driven up by many investors moving funds out of assets held in euros to buy in to what is at the moment seen as a ‘safe haven’ alternative.

A report by Fathom consulting for development securities showed that foreign money seeking a refuge from wider economic turmoil accounted for 60% of acquisitions of central London property between 2007 and 2011.

It is also worth considering that it is not just theUKfinancial markets that may suffer with a euro break up, some 3.5 million British jobs also depend on the European economy.

In conclusion, the monetary policy committee and the financial policy committee have suggested that the impact of a euro break up would depend on how it was handled by European authorities.



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