- August 9, 2016
- Posted by: jonnyhough
- Category: CT Blog
1. What do you think are the overall implications of Brexit on the UK economy?
The truth is we just don’t know.
When economists pronounce on the likely outcome of events we usually aim to identify relationships evident in the data describing similar previous events. So, for example, much was made of the 1929-1939 Great Depression when debating the merits of various policy responses to the global financial crisis of 2008-09. Extrapolating from one data point was risky, but needs must.
So how many historical comparators do we have for Brexit? Some have pointed to the collapse of the Soviet Union, which involved the break-up of a 70 year old trading block but much else besides. And Radio 4’s The Long View helpfully compared this summer’s shock to the English Reformation, but unfortunately without any insights into the impact on house prices.
Essentially we have no data points or robust comparators to help us understand the consequences of the referendum result. Moreover we will have to wait until March 2017 (with the publication of the ONS’s 2nd estimate of 3rd quarter GDP) to know if the vote triggered a recession.
We can expect that much of the short-term impact will come from changes in investor, employer and consumer confidence, as well as the exchange rate. And whilst the UK domestic banks are said to be on a sounder footing than in 2008-09, the Bank of England has been sufficiently concerned by a raft of sentiment surveys to announce a base rate cut, the re-starting and extending of quantitative easing and some new incentives to keep the banks lending. The longer term impacts will of course depend on the final shape of the EU divorce settlement, and new trade deals with non-EU partners. Both of which could take many years to finalise.
2. How can Associations plan in such circumstances?
In the face of so much uncertainty, HA’s and their Boards should hedge rather than bet. Instead of basing plans on point assumptions of house prices, wages, inflation, etc., they should explore strategies that are robust in the face of different outcomes.
Stress-testing is not just for regulatory Christmas, rather it is designed for precisely this kind of uncertainty. New perfect storms should be explored and early warning systems, triggers, mitigations and responses retested for relevance and appropriate scale.
Box 1: Possible perfect storm elements
• House prices fall (outright sale, Right to Buy, shared ownership)
• Sales volumes shrink or dry-up
• Cashflows hit as home ownership products are flipped to rental products
• Commercial subsidiaries fail
• Possible impairments: including landbanks, shared ownership assets, work in progress, loans and/or investments in subsidiaries or joint ventures.
• Major contractor failure
• Gilt rates keep on dropping
• Pensions deficits grow
• Labour shortages
• Rising costs of (imported) raw materials
3. Is there a possible upside to include in business planning scenarios?
Yes, I think there may be.
We are already hearing talk of using a fiscal stimulus and boosting funding for infrastructure if the performance of the economy disappoints. If we experience significant downturn and if falling house prices cause sales of shared-ownership dry-up (as they have done in the past), we could see the return of subsidy to promote building of new social or affordable rented homes. And if banks’ non-performing loans start to rise, some kind of mortgage rescue scheme may even be on the agenda.
4. How could HAs respond to your suggestions?
We always recommend that organisations split their stress-testing investment between 1/3rd modelling and 2/3rds thinking about mitigations and responses to those perfect storms. The Board needs to plan for what it would do to ensure that cash holdings and covenant cushions can withstand the new worst case scenarios.
Box 2: Possible actions
• Monitor mortgage availability, especially for shared ownership
• Frequently monitor house prices and transaction volumes, at local level and by property type
• Keep a close eye on the marketing and pricing of competing new build schemes
• Closer monitoring and tighter control of commercial subsidiaries
• Identify triggers for development slow-downs or halts, and tenure switch decisions
• Validating that the next slice of security is charge-ready
• Contingency planning for further collateral calls (where relevant)
• Monitor all possible impairments and create sufficient I&E absorption capacity in good time for year-end
• Monitor financial wellbeing of major contractors
• Determine appetite for rescue and how would quickly assist someone in a pickle
• Scope quick responses to possible new Government initiative
In conclusion: Keep calm and stay liquid!
Sue Harvey is a Director at Campbell Tickell. For more information or to discuss this article, please contact: firstname.lastname@example.org