Since the United Kingdom’s historic vote on June 23 in favor of exiting the European Union (referred to as “Brexit”), there has been much speculation about its potential impact on the global community including the effect on stock markets, gold and bonds as well as on real estate.
The consensus among financial and real estate experts is that the Brexit vote could cause U.S. housing prices to rise. This impact on U.S. real estate is anticipated due to the increasing interconnectivity of the global economy.
When the vote for the United Kingdom to exit the EU was announced, global financial markets went into freefall. The expected ongoing turmoil in connection with the U.K.’s withdrawal from the EU and the domino effect it may have on other EU members is predicted to put downward pressure on U.S. mortgage rates.
Lower mortgage rates generally translate into higher prices because low interest rates make it possible for buyers to afford to purchase higher priced properties without having to earn a higher income. At lower rates, the loan amount and monthly mortgage payments become more affordable.
Moreover, a period of prolonged uncertainty is expected in London as it sorts out its political and economic status in the global world economy. During this uncertain time, it is expected to lose its status as a premier safe haven for global money.
International buyers have been increasing investment in the U.S. over the last several years. As their familiarity with the U.S. property market has grown, these investors will likely view the U.S. as a sound alternative to London real estate.
The British National Assn of Estate agents and the Assn of Residential Letting Agents forecast that the win for Brexit will result in a huge reduction in U.K immigration levels. This will mean less demand for U.K. housing and office space and therefore depressed sales prices and lower rental prices.
This prediction of a drop in U.K. property values and rents comes after a warning by Christine Legarde, the managing director of the International Monetary fund, that the U.K.’s decision to leave the EU would result in “sharp falls” in house values and the stock market. Even before the vote, construction of commercial projects in the U.K. had stalled for fear of making long term commitments in the face of so much financial uncertainty.
London office values are speculated to drop 20 percent in the next 3 years as businesses relocate with a projected 15 percent drop in retail space. According to London-based Fidelity International, which manages $1 billion of real estate assets, including $664 million in the U.K., it could take several years to understand the impact of the Brexit vote.
London represents the largest market for Euro-denominated trading. Banks with trading offices in London are now concerned that they will need to relocate, including Deutsche Bank AG and HSBC Holdings PCB. JPMorgan, the largest U.S. Bank, said it may move up to one quarter of its 16,000 British workers.
There is another reason that the U.S. is becoming more attractive to foreigners for investment here. The U.S. Government made investment in the United States easier with the December 2015 rule change easing the tax burden on certain foreign investments. For example, a non-U.S. investor can own up to 10% of a REIT before incurring Federal taxes. This is up from the prior cap of 5 percent before becoming subject to Federal taxation.
Prime U.S real estate markets including Los Angeles with its desirable luxury residential neighborhoods that appeal to the very wealthy are expected to be a big beneficiary of the loss of London’s appeal as a safe haven for property investment.
Lucian Cook, head of residential real estate for global consultancy firm Savills, acknowledged that the uncertainty prior to the Brexit vote impacted buyers causing them to hold back. Continuing uncertainty is expected to have a similar impact on U.K. real estate. The Luxury real estate sector there is expected to be more affected.
Foreign buyers invested about $80 billion in U.S. real estate last year according to reports by the National Assn of Realtors. Most were from China (16 percent), with Canada following closely (14 percent), then Mexico (9 percent), India (8 percent) and Britain (4 percent). Most are investing in luxury real estate valued at about $15 million and more. Most economists are saying foreign buyers will probably steer clear of investing in London heading for markets like San Francisco and L.A. instead. Look for more investment in major U.S. Coastal cities.
Anyone considering buying or selling a home is advised to keep an eye on the news out of Europe and its possible effect on U.S growth.
According to a report by CNBC on May 18, a poll conducted by Zillow of real estate experts showed which Presidential candidate would be best for the health of the real estate market here in the United States. The results showed Republican nominee Donald Trump and Democratic nominee Bernie Sanders would set back the housing market recovery and prospects for economic growth.
The panel of experts would rather have a candidate elected with more centrist views, naming either Democratic nominee Hillary Clinton or Republican Governor John Kasich, who suspended his campaign after the survey was conducted, as best for the U.S. real estate market.