By now you’ve heard a lot about BREXIT, the United Kingdom’s historic vote to divorce from the European Union that shocked the world. The referendum on June 23 that ended in favor of succession from the EU (by a margin of 53.4% to 46.6%) caused a seismic economic boom in London and ripples that reached every corner of the globe.
In fact, the financial impact of BREXIT has already been nothing short of devastating for England and the UK. June 24 – the day after the vote – the UK’s stock index, FTSE 250, plunged a post-wartime record 7%. The next day, instead of rallying to regain ground as cooler heads had prevailed, it dropped another 7% instead, amounting to a wipe out of about 40 billion Pounds from banking stocks in one felled swoop. The UK Pound soon dropped to a 31-year low and Standard& Poor even downgraded the credit rating for the entire UK economy. Ouch.
But it wasn’t only our plucky friends across the Big Pond that suffered the wrath of the BREXIT exodus. On Wall Street, the U.S. stock market reacted to the news with a 611 one-day loss for the DOW, which amounts to a shocking 3.4% decline, and the S&P 500 lost a similar 3.6%. While our U.S. market has somewhat stabilized and isn’t expected to suffer catastrophically from further news, in today’s interconnected global economy, there is no doubt that BREXIT stunned markets all over the world, from government bonds to the price of gold to stocks.
But as the UK tries to sort out what’s next and pull themselves out from an impending political and economic vortex, there could be a silver lining to BREXIT:
Fortunate for us, one of the segments that stand to directly and immediately benefit from BREXIT are U.S. homeowners. In fact, international investors will start moving money to U.S. real estate.
The UK has long been a safe haven for wealthy foreign investors (and there are a lot of them and they have A LOT of money!) to park their money, particularly in real estate. The stability and safety of the UK’s banking system and economy are considered favorable to that in their home countries, and many investors feel that emerging economic super powers like China, India, Brazil, etc. are way too volatile and lack transparency. Thanks to that influx of wealthy foreign investors, London real estate has soared to the highest prices in the world.
But with BREXIT, London, England, and the UK is no longer a safe bet. In fact, BlackRock predicts an across-the-board 10% decline in London real estate prices over the next year alone, commercial office space is expected to plunge by 18%, and tens of thousands of jobs will likely be lost.
With the value of the British Pound currency falling off the table, their stock market plunging, and even their national credit rating downgraded following the referendum to leave the EU, the U.S. dollar is looking better than ever sitting next to the coin of the Crown.
For those reasons, many analysts expect a critical shift of foreign capital to flow from the UK into the United States real estate markets, both commercial and residential. Point blank, U.S. real estate is cheap, accessible (many chose to invest via REITs and other vehicles instead of individual ownership), and the U.S. economy sits on sound bedrock that few around the world enjoy.
It’s a basic precept, with stability, predictability, and safety the most valuable commodity for investors in the shifting landscape of the post-BREXIT vote financial world.
As Leonard Steinberg, president of real estate brokerage firm Compass, puts it, “Dollars have to flow somewhere. All currencies have to flow somewhere to be invested – why not in the safest economy and environment and that could be the United States?”
That sentiment is echoed by analysts like KC Sanjay, Senior Real Estate Economist with Axiometrics, who feels, “International investors have been [already] increasing their holdings in the U.S. over the past several years, as they have gained a better understanding of the American market and appreciation of the sector’s profitability.”
Sure, investors with the long view can certainly invest heavily in the British Pound and wait a couple years (probably) for its value to recover again, but people always need to place their money in some investment vehicle – whether it be real estate, stocks, funds, gold, etc. NOW, and thanks to BREXIT, U.S. real estate could very well become the flavor of the month…or the year….or the decade, for that matter.
Experts like Louis Archambault, real estate lawyer and partner at Arnstein & Lehr LLP, don’t predict a sudden return to form for the Pound, which makes the U.S. housing market even more attractive. Says Archambault, “The US is one of the more stable markets right now in the world. I would be looking very seriously to converting that money and investing it in United States.”
The sudden jolt of demand and influx of foreign capital into our housing and commercial real estate market could very well move the needle on housing prices, appreciation rates, and other industry metrics as soon as six months or a year from now, with the biggest impact believed to be felt in large cities like Los Angeles, New York, and the Miami area, all traditionally popular with foreigners. But the handwork of smart investors should spill over to other emerging metropolitan markets – like Sacramento and Northern California – that present unboundless opportunities for growth.
Not only will increased demand and the flow of foreign capital further incentivize the U.S. housing market, but the immediate effect of BREXIT is already being seen on interest rates. After the UK’s referendum passed and the financial markets took a haymaker, already we’ve seen U.S. government debt in a free fall, with yields on the 10-year Treasury dropping from 1.75% to a low of 1.43% in early trading. Movement on the Treasury exerts downward pressure on mortgage interest rates, and already we saw a small 0.02 percentage point correction on mortgage rates, according to NerdWallet.
While a drop of 0.02 isn’t a major shift, it very well temper interest rates from rising, as was to be expected, over the next 18 months, keeping them in favorable territory for those looking to purchase a home with a mortgage or refinance. Mortgage rates usually see a lag time as they adjust to other indices and economic news, so we most certainly haven’t even seen the full (and positive – for us) effect of interest rate drops to come.
A spur in demand; big spenders who need to park their money somewhere safe; an emboldened U.S. dollar versus the Pound, and downward pressure on mortgage interest rates; what does it all add up to?
Over time, London’s misfortune may very well be good news for the U.S real estate market – and our local home prices.