Yields on US government debt saw a vast decrease following the UK referendum on 23 June 2016, putting downward pressure on US mortgage rates. The average rate on 30-year home mortgages fell to 3.66 percent, the lowest since May 2013, from 3.75 percent the previous week according to the Mortgage Bankers Association. This development is likely to see higher home prices benefiting owners (i.e. potential sellers, investors), while low rates for buyers translate into them being able to spend more on housing from the same pay cheque.
Investors are now likely to consider the US real estate market – specifically in major industrial cities – in favour of the London market, in order to reduce their exposure to uncertainty following the referendum outcome. Analysts have predicted that housing prices in the UK will fall persistently over the next three to 12 months; supply will drop as people hold onto the property they currently own (despite it losing value); that buyer (i.e. mortgage) demand could hit an eight-year low; and that banks are likely to tread cautiously in the granting of mortgages.
The UK is said to be a big player in corporate America’s global infrastructure, including assets under management, sales and R&D. While it was previously considered a gateway for exposure to EU markets, UK debt may in future not be included in European banks’ emergency cash reserves, creating liquidity problems.
And the effect of the Brexit on currency? Well, the pound was seen to drop to historic 30-year lows against the dollar the day after the vote – it dropped more than 10% to $1.33, compared with $1.50 just after polling stations closed – the lowest since 1985 (and a 7% drop against the Euro). At the time of publication, the pound had stabilised at $1.32, while the Euro was sitting at 1.20, a few notches down from the 1.24 it was at just after the referendum. US export companies trading with Europe could suffer, as a result, in our highly interconnected global economy.
Predictions are that firms in the financial services and ICT sectors are the ones most likely to move their operations out of the UK – possibly to the tune of up to 100 000 jobs! This, in turn, will detract from the volume of office and also housing rentals required in London and other UK business centres.
Analysts have expressed concern about UK housing prices too, predicting drops of as much as 20% over the coming year. And while low interest rates can insulate a property environment, individuals need to feel confident about the security of their jobs to be able to make purchases. In the UK, the Brexit will likely affect every buyer and seller’s movements for these reasons.
So, uncertainty about the UK property environment and a weaker pound could send property investors elsewhere – to Europe, if the currency exchange is strong (not necessarily the case); almost certainly to the US. Globally, the US presents possibly the most stable economy and property investment environment available; but its own elections, on 8 November 2016, could sway things one way or the other.
Recently, the US government also eased tax burdens related to international investment in the country, and has added exemptions on certain foreign pension funds – further incentive for international investors to steer their funds westwards.
Others, however, could take a wait-and-see approach as major analyst predictions – such as a selection of the above – may not come to pass or, if they do, may not be as extensive as predicted. The UK, after all, has always taken its place as a global financial centre.
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