Greek bailout and its affect on the UK housing market

Monday 10 August 2015

After spending more than their income with rising public sector wages, still paying for the 2004 Athens Olympics and soaring public spending, Greece’s budget deficit has become out of control. After the global financial downturn the country was ill prepared to cope and Greece is now formally in arrears as they are unable to repay their loans.

Recently Greece received help from the International Monetary Fund (IMF) and European Union in the form of bailouts for the third time. However they missed their latest deadline for a 1.5 billion euro (£1.1bn) payment to the IMF and have become the first advanced economy to default on an IMF loan. Greece will have to embark on severe austerity measures, including; spending cuts, tax rises and pensions reforms in order to pay back the total debt of 323 billion Euros which they owe to various countries and banks within Europe.

How will it affect the UK?

Britain’s direct exposure to Greece is relatively small, although Britain is a shareholder in the IMF with a stake of 4.5%. This is not much compared to the German and French stake but it is still a significant amount of just under 1.5 billion euros.

We are also connected to the continent through trade. Europe is the main UK trading partner and a European decline could result in a negative impact on the British economy. This is illustrated in comments made by Chancellor George Osbourne who previously warned that the Greek crisis is a ‘major threat to the UK’s economic recovery’. With exporters potentially being hit hard, jobs lost and business investment facing problems the knock-on effect could be so great that even with Britain’s small exposure a new recession may be inevitable.

The Bank of England is closely monitoring Britain’s housing market. Their main concern is that an escalation of the Greek crisis will cause instability to spread across Europe as investors reconsider the risks of other investments, leading to reduced liquidity that would make it harder for investors to sell shares and bonds. While British banks’ exposure to Greece has shrunk to just 1%, their exposure to other Eurozone economies is much higher at 60%.

If Greece were to have a mass default that causes contagion and panic we could see a repeat of the financial crisis and credit crunch that we had in 2007 to 2009. If this were to happen then gilt yields and money market rates would spike higher which in turn means higher rates on new mortgages. This then puts pressure on banks to increase standard variable rates.

On the other hand, Mark Carney, the new governor of the Bank of England, expects a limited impact on the UK. He says that ‘a series of defences are in place and depending on how events unfold those may be tested [but] a persistent impact on economic activity is unlikely’.

How will it affect the UK in a positive way?

If Greece were to default then the real estate market in London could receive a boost. As instead of foreign investors parking money across the Channel where they fear other countries might follow suit and also leave the Euro, they will buy real estate in the capital. Craig Hughes of PwC is quoted as saying that ‘Europe’s loss would be London’s gain. It would boost its potential as a safe haven’.

If Greece were to exit the Eurozone this could result in investors panicking and dumping all forms of sovereign debt, British gilts could benefit. In that perception of the UK will be as a safe haven to many international investors. The UK is now recognised as a safe place to put money in uncertain times. If the Greek fallout only rattles the markets as opposed to causing contagion it could possibly make gilt yields – and therefore mortgage costs – fall.

Moreover, there could potentially be a fresh surge of cheap loans from the Funding for Lending Scheme (FLS). The FLS was introduced in 2012 due to the Eurozone crisis to counter the tightening of lending conditions in the UK. David Hollingworth of broker London & Country said that ‘It’s introduction provided UK lenders with access to funds that provided a buffer against the uncertainty of the crisis and the rising cost of funds that was pushing rates up’. The recovering British economy saw the rates increase but the Greek crisis, as well as other concerns, has helped to cap the rise.

UK Citizens who own homes in Greece

For the UK citizens who own property in Greece, any exit from the Euro is likely to see the value of this property decrease. If people rent these houses out during the year they will have to make a decision on whether to charge rent in euros or drachma.

Should Greece have to return to drachma, this could cause an overall devaluation of the country’s assets and as such people renting holiday homes could find the overall return on investment very weak. However if they continue to charge tenants in Euros they may struggle to find tenants because it would be more expensive by local standards.

Until matters become clearer investors can expect extreme stock volatility but it is worth noting that European nations and their banks are now much better insulated from the threat of a Greek default and exit from the Eurozone. The Bank of England is reportedly working closely with the Treasury, Financial Conduct Authority and European counterparts in order to draw up a contingency plan to safeguard the British economy. With a report from the Bank of England stating that ‘The UK authorities will continue to monitor developments and will take actions required to safeguard financial stability in the United Kingdom’. However it is still too early to say definitively what the knock on effect for Britain will be.