Residential properties stand in Selkirk, U.K. If Scotland adopted a new currency,... Read More
Political leaders in the U.K. are sparring over whether an independent Scotland would keep the pound, with the outcome having major consequences for the economy and housing. If Scottish homeowners eventually have to repay pound-denominated loans in a foreign currency, they would face the risk of higher costs and possible default.
Prime Minister David Cameron warned on Sept. 14 the breakup would be akin to a “painful divorce,” and said the U.K. won’t share its currency with an independent Scotland. Independence leaders dismiss the government’s threat, insisting that Scotland and
the rest of the U.K. would form a currency union to benefit both nations.
“A Scotland outside the U.K. would open the floodgates to the real questions of currency, exchange rates, mortgage risk, and property taxation,” Gordon Fowlis, regional managing director of LSL Property Service’s Your Move unit, said in an e-mailed statement. “Many mortgage holders could see their loan-to-value shoot up as the implications of borrowing from a bank in a foreign country are unmasked.”
Interest Rate Slave
If an independent Scotland kept the pound, it “would mean being slave to the interest rates set by and for the remainder of the U.K. There would be no more consideration of Scottish issues when monetary policy is set,” Deutsche Bank AG Group Chief Economist David Folkerts Landau wrote in a Sept. 12 note. “As Scotland’s banks would no longer have access to Bank of England support they would have to shore up their balance sheets by reducing their lending.”If Scotland adopted a new currency, borrowers with pound mortgages would face the possibility of higher payments. One in five homeowners in Scotland would find it difficult to afford their mortgage payments if they rose by as much as 50 pounds a month, according to a survey published Aug. 20. by Halifax, the mortgage unit of Lloyds Banking Group Plc, the U.K.’s largest home lender.
Danny Gabay, director at Fathom Consulting in London, said a vote in favor of independence would create uncertainty in the market and higher mortgage costs.
“Banks would be much more reluctant to take on risk because it’s not clear who the sovereign behind them is,” Gabay said. “All of that adds up to a tightening of credit conditions in Scotland and is likely to put downward pressure on house prices, which are already overvalued relative to income.”
Record Prices
Average home prices in Scotland are now at record levels after values rose 7.6 percent in the 12 months through July, lagging behind the wider U.K.’s 11.7 percent gain, the Office for National Statistics said yesterday. A nationalist victory could wipe off 17.5 percent from the average home price of about 177,600 pounds in Scotland because demand will drop as businesses move south of the border, website Zoopla Property Group Plc (ZPLA) said Sept. 15.Uncertainty surrounding the vote is already discouraging wealthy homebuyers, Ian Morton, principal at Bradburne & Co. in St. Andrews, said in an interview. Particularly, “the larger farms and estates that overseas buyers would traditionally purchase -- they seem to be hesitant, waiting to see the outcome before they buy anywhere,” he said.
Pound Warnings
While Cameron of the Conservative Party and the heads of the two other main parties in London have said that an independent Scotland can’t keep the pound, First Minister Alex Salmond said the new nation would maintain the currency.Salmond, the leader of the independence campaign, has said the pound is just as much Scotland’s currency as the rest of the U.K.’s. Scotland is the second-biggest market for the rest of the U.K., which would be damaged if the pound was taken away.
Nobel-award winning economist Joseph Stiglitz, who serves on a panel advising Scotland’s nationalist government on the finances of independence, said last month that the U.K. government is using the pound as a bargaining chip. If Scotland gains independence, a currency union would be in the best interests of both sides, he said.
Currency Union
“Scotland would transition to independence over 18 months and seek to establish a currency union to enable the new nation and the U.K. to continue to use the pound,” Scottish Finance Secretary John Swinney said in a Sept. 10 interview on Bloomberg Television.The Bank of England would be the bank of last resort if that union is established and financial regulation would also be undertaken by the central bank to provide security and the observance of financial stability, he said.
The potential for foreign currency-denominated mortgages to devastate a market can be seen in Hungary. Hundreds of thousands of Hungarian homebuyers who took out Swiss-franc mortgages faced soaring payments and defaults as their own currency slumped as much as 44 percent against the franc since 2008.
London’s Gherkin tower went into receivership in April because an IVG Immobilien AG fund, which part-owned the building, took out a loan in Swiss francs. The currency gained about 63 percent against the pound during the seven years after the fund acquired the skyscraper. That increased the amount owed to the point that it breached rules on how much debt could be held against the property.
Hedging Product
To avoid similar currency effects, commercial property investors usually buy a hedging product. Residential mortgage holders may not have that option.“Retail customers typically don’t have the ability to enter into long-term currency hedges given the contract could become a huge liability, so banks limit the term to a few months or maybe a year,” Mark Battistoni, managing director of Chatham Financial Corp. and an adviser to the Commercial Real Estate Finance Council Europe, said by e-mail. Borrowers “would be unlikely to be able to hedge in a convenient way by matching their mortgage payments with a hedge over time.”
The biggest names in Scotland’s financial-services industry -- Royal Bank of Scotland Group Plc and Lloyds Banking Group -- said they plan to move to England in the event of a yes vote. RBS cited uncertainties arising from the “fiscal, monetary, legal and regulatory landscape to which it’s subject”.
National Australia Bank Ltd.’s Clydesdale Bank, TSB Banking Group Plc, Tesco Bank and Standard Life Plc, Scotland’s largest insurer, have all said they’ve made contingency plans to move parts of their businesses to England. The chief executive officers of BP Plc and Kingfisher Plc have also spoken out in favor of the U.K. remaining united.
Company Moves
These large corporate relocations could benefit London’s property market, Rightmove Plc. said on Sept. 15. Asking prices for homes in the capital rose 0.9 percent in September from August, ending three months of declines, the company said. London property is now worth 1.5 trillion pounds, or almost four times as much as all the residential property in Scotland combined, Andrew Bridges, managing director of London-based broker Stirling Ackroyd, said yesterday.“Clearly if you have a big increase in financial and business services sector employees and they are relatively highly paid, then it will increase the demand for housing stock in certain locations,” Lucian Cook, a director at Savills Plc (SVS), said.
RMBS Exposure
Scotland doesn’t make up a significant part of the U.K. residential mortgage-backed securities market, with a median of 9.8 percent of prime and 1.1 percent of buy-to-let RMBS, according to Deutsche Bank. The three securities with the most exposure to Scotland are Silk Road 2012-1 at 28 percent, Lanark at 22 percent and Leofric 2012-1 at about 21 percent, analysts including Conor O’Toole in a Sept. 5 note to clients.Tony Ward, chief executive officer of mortgage servicer Home Funding Ltd. in Tenterden, England, said uncertainty will prevail no matter the outcome of the vote.
“There isn’t a lot we can really do now except grit our teeth and let it run through,” Ward said. “Hopefully common sense will break out and both parties sit down to resolve what they need to do to settle markets and give some certainty.”
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