What to Expect after Brexit

What happens next after Brexit?

The voters of Great Britain shocked the world a few days when they voted to depart the European Union. The markets around the world hit the skids in response, with the lone exception of sovereign bonds.

What does this mean for Canada?

Well, the vote doesn’t necessarily mean that Great Britain will leave. The British Parliament does still have to vote to leave the EU – even though they are expected to follow the referendum. Even then, Great Britain couldn’t leave until 2018, and the country could decide to vote again and stay in. Even if the country ends up leaving, it’s likely that they will negotiate a new trade deal with the EU. About 50% of all British trade takes place with the rest of Europe after all.

The British Treasury projects that GDP will drop by 3.6% in two years. This projection has unleashed the sort of uncertainty – including questions as to which other countries will leave the EU, or whether Scotland will seek independence from Great Britain and enter the EU on its own – that is likely to cut foreign investment in the country. However, on the other hand, the world’s central banks are likely to have a looser hand on money supplies. This includes the United States, where the Fed has indicated that they are not going to jack up interest rates – and now they are likely to stay rock-bottom for a longer period of time.

So with the American Fed keeping rates down, Great Britain losing its AAA credit rating and other economic consequences, that means that Canadian bond yields are going to run lower. That does not mean that mortgage rates are going to go down, though. Canada will see more influence on possible inflation from the price of oil dropping and negative morale than any impact from trade with the UK. It’s likely that these consequences will take some time to play out, rather than being the immediate death knell that the fearmongers are presenting.

So if you’re looking for a mortgage, there is a chance that you will see higher risk/liquidity premiums, particularly for loans with variable rates. For any material cuts in fixed rates, the 5-year yield would have to get to its historic low (0.40%) or even further. With regard to the prime rate, the talk of Brexit is likely to slide projections of interest rate hikes into 2018 or beyond.

British instability could increase demand for housing in Canada. As the European marketplace starts to rumble a bit, the foreign investors who have been contributing to the skyrocketing values in Vancouver and Toronto are only likely to increase their activity. If the Canadian dollar goes down, this could be an even bigger phenomenon.

The hope is that policy makers will intervene to bolster the value of the Canadian dollar. As that value slides, issues will start to impact not just the mortgage industry but other sectors in the Canadian economy. It’s too early to panic about Brexit, but it’s not too early to be aware of what might happen.

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