Brexit wont pop the bubble

On Friday morning, the unexpected occurred. The British population voted to leave the EU in a historic referendum as the Leave campaign garnered 17,410,742 votes, or 51.89% of total votes counted. Consequently, David Cameron said he would resign in the interests of political stability, to allow for a “fresh leadership” to take Britain in the new direction chosen by voters. The next Conservative party leader (expected to be contested between Boris Johnson and Theresa May) will be chosen by October in time for the Conservative party conference. Markets reacted badly to the news across all asset classes, most notably in FX and equities. Sterling fell to a 30yr low in the biggest drop on record, to $1.3232 (~$1.3223 at time of writing this) and €1.2378 (€1.1996 at time of writing this) and the share price of London listed equities also tumbled, with housebuilders and banking names leading the declines. Today, Barclays and RBS’ shares were suspended after automatic circuit breakers were triggered as their share prices fell 10.3% and 15% respectively.

The political uncertainty has spread across Europe, with the result of our referendum sparking demands from far-right parties to kick off similar proceedings in member states. Marine Le Pen, leader of France’s Front National called for a referendum on France’s membership and Dutch anti-immigration politician Geert Wilders said the Netherlands deserved a “Nexit” vote.

What does “Brexit” mean from a property investment perspective?

Ultimately there will be many impacts but I’ve decided to focus on it from two dimensions; domestic and foreign investors. In the short term, as volatility continues to cast doubt over the bigger macroeconomic picture, I would expect domestic demand to decrease and investors to hold off from purchases until the ‘risk-off’ mode we are currently experiencing calms down. As a result homebuilders are expected to put future plans on hold until we see what happens to interest rates, inflation, house prices and the confidence of banks and purchasers.

The primary reason for this in my opinion is because many investors may see the decision to leave as a threat to their jobs, it has been reported that employers may need to perform a ‘downsize adjustment’ to their operations. Banks such as Citigroup and JPMorgan warned in the run-up to the referendum that they may have to move jobs out of London in the event of an Brexit, which would have large potential implications for Canary Wharf, home to thousands of their employees. As much as the short term outlook doesn’t look too positive, the medium to long term, once the dust settles, should be more positive and house prices will continue to grow as the underlying themes driving the market such as 100% mortgages, Help to Buy ISA and Crossrail/HS2 start to take shape.

Looking at the interest rate probability predictor on Bloomberg, there is a circa 78% chance that the Bank of England cuts the Base Rate 50 basis points to 0% in December, which would consequently mean a reduction in mortgage rates, so holding off until Q4 2016/Q1 2015 to jump on the ladder may not be the end of the world.

Probability of a rate cut (source: Bloomberg)

Probability of a rate cut (source: Bloomberg)

The interntional impact

If we look at the market from a foreign investors perspective, it couldn’t be a better time to buy. The pound continues to weaken with no end in sight as evidenced below and this may reignite interest from overseas buyers, who could see greater value back in the UK market if the currecy depreciation carries on. With a Brexit scenario now confirmed, we may see a price correction in property, which opportunistic international investors will view as a chance to dump their cash back into the UK.

Depreciation of the pound vs major currencies

Depreciation of the pound vs major currencies (source: Bloomberg)

The UK property market is widely regarded as a “safe haven” for overseas money during periods of financial instability, offering attractive yields even in an uncertain economic climate, so as the exit/remain decision spreads to other member countries of the EU, I’d expect investors across Europe and Asia to park their cash in a one bed studio in Kensington.

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  1. Pingback: Brexit won’t pop the bubble II | Capital Moments

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