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The upcoming referendum on Britain’s membership of the European Union has ignited a fierce debate.
Unfortunately so far both sides have been subjecting us to spin, scaremongering and name calling but sadly few facts or argumented points.
Fortunately, a wealth of resources is available to help shed light on possible consequences of leaving the EU on the private rented sector.
The PRS is a bit of a niche so I looked at the likely impact of a Brexit on the main areas affecting private landlords.
In my opinion, these are: the economy in general, population growth, the property market, finance, taxation, and relevant laws and regulations.
Clearly this is a very contentious topic, at least if you listen to politicians. We are promised that a Brexit would lead to anything from economic armageddon to roads paved with solid gold.
My assumption here is that economic downturns have an overall negative impact on the PRS due to increased rent arrears and pressure on rents.
Leaving the political spin aside, experts seem to mostly agree that a Brexit would have a negative impact on the economy, at least until the dust settles (which, of course, could take quite a few years).
The main supporting arguments are:
- A prolonged uncertainty over the UK’s new relationship with the EU (and indeed perhaps the world) would discourage investment, especially foreign investment. Interestingly, if that’s correct then it should already be happening right now (see the just announced dip in construction, and services growth).
- Maintaining full access to the single market might be tricky.
- Restricted immigration would also likely hurt competitiveness and perhaps public finances (I know, some claim that immigrants are scroungers, but others point that they are in fact net contributors the economy).
On the positive side, a lower Pound could boost exports, and the economy could benefit from less regulation. Although the latter would take time due to the legislative process, and the UK’s economy is already one of the least regulated Western economy so potential benefits are likely small.
In conclusion, a Brexit would likely negatively impact the economy, even if only for a few years in optimistic scenarios. In turn this could lead to increased rent arrears and put pressure on rents growth.
Population growth is a key indicator for the private rented sector and the property market in general, this is not rocket science: The business of housing people always welcome more potential customers.
Now, I think we can agree that a Brexit is unlikely to trigger either a baby boom or mass mortality (at least no-one has claimed either yet). Any impact on population growth must then be through net migration.
It is unclear how, when, or even if, immigration would sharply decrease should Britain leave the EU.
First, because currently about half of the net migration to the UK is from outside the EU, so already under the government’s control.
Then, because even in case of a Brexit it would seem difficult to remain in the single market (seen as crucial for the economy by most analysts) and to limit immigration from EEA countries (EU plus Norway, Iceland, Lichtenstein) at the same time.
However, since a reduction of immigration is a much touted objective of leaving the EU, we can only assume that it would happen.
In addition, net migration would also be affected by the economic impact of a Brexit. Assuming a negative impact (at least at first) as discussed previously, net migration into the UK would likely fall.
Overall, this points to a reduced population growth, though perhaps not by much.
The Governor of the Bank of England, Mark Carney, recently said that a Brexit could lead to an interest rate rise.
The reasoning is that a Brexit would likely lead to a lower Pound (we are already seeing that) and higher interest rates on money markets. The BoE would thus likely have to increase interest rates in response to inflationary pressures.
Of course, others are saying the opposite, i.e. that interest rates would remain lower for longer if we were to leave the EU.
But… their reasoning is that the BoE would have to keep interests low because the economy would take a beating.
Because of all the above, it seems reasonable to expect that a Brexit would have a negative impact on the property market and indeed this is what most experts predict.
Whilst this would not be good news for the PRS in general, it could create purchase opportunities.
However, one concern is that any lasting impact on the economy and net migration could translate into a lasting negative trend on the property market.
The EU has a limited impact on taxation.
It does set a minimum VAT rate, however VAT has a limited impact on private landlords, and the current standard VAT rate is about 5 percentage points above that minimum: If the government wanted to reduce VAT it could.
The recent tax measures taken by the Chancellor against the private landlords are purely a matter of domestic policy, which I think is unlikely to be affected by a Brexit.
Laws and regulations
The bulk of the PRS legal framework, including the latest restrictive trend, is a matter of domestic policy.
The impact of EU law (EU Directives) is limited and mostly relates to more general policies: energy performance, consumer protection, non-discrimination.
As these EU Directives have been transcribed into UK law, leaving the EU would have no immediate effect apart from giving Parliament the power to modify or abrogate the relevant Acts.
In any case, I think unlikely that Parliament would take action against these issues, though we would all be happy to see the back of EPCs.
On a related note, my understanding is that human rights aspects are mostly governed by the European Convention on Human Rights, which is not linked to EU membership, and indeed Britain ratified it long before joining the EC.
Based on the above I suspect that a Brexit would have little to no effect on the PRS legal framework.
In conclusion, the needle points towards negative consequences for the PRS should the country leave the EU, and it seems unrealistic to expect a positive effect.
The more optimistic view is that negative effects would be mild and short-lived.
The most pessimistic view is that a Brexit could trigger a long term negative outlook for private landlords.
Credible references contradicting any of the arguments put forward in this article will be gladly received. To contact me please see the bottom of the page.