The Impact of Brexit on US Real Estate

the-impact-of-brexit-on-us-real-estate

Britain’s decision to leave the European Union (EU) triggered the biggest ever selloff in global equities. More than $3 trillion was wiped from the global financial markets in a matter of days,[1] as investors fretted about the long-term consequences of the so-called Brexit.

While markets have more than recovered, Brexit is expected to have a direct impact on the global economy and the politics of the EU. Here at home, the ripple effects will also be felt on real estate market, both directly and indirectly.

Interest Rates

The Brexit vote put an end to interest rate speculation. The Federal Reserve, which has been arguing about raising interest rates all year long, no longer has the impetus to adjust monetary policy anytime soon. That’s because Brexit will have a direct impact on certain segments of the US economy, including the more than $56 billion in products American companies export to the UK.[2]

Increased Capital Flows to US Property

One week after the Brexit vote, investment funds have been unable to contain the mass exodus of investors fleeing UK real estate. As a result, they have frozen billions of pounds’ worth of withdrawal requests, leaving investors high and dry.[3]

UK house sales are forecast to fall sharply[4] and commercial property prices are also expected to decrease.[5] As a result, investors could potentially look across the Atlantic to diversity their holdings in real estate. As a result, we can expect capital flows to US property to increase in the short-term.

More US Buyers May Look to Enter UK Property Market

The outlook on the UK real estate sector is bleak. The latest report from the Royal Institution of Chartered Surveyors (RICS) said the uncertainty fueled by Brexit will create a “marked drop” in housing activity. This is expected to dent buyer interest and future sales.[6] With reduced demand comes a fall in prices that could, in the long run, make the UK an attractive place to pick up affordable flats.

As the Chinese have no doubt demonstrated recently, wealthy investors like to buy foreign real estate, especially in prime locations like London. A marked decline in property values could divert US capital to places like London, where homes could be had for cheaper.

One Thing is Clear: The Path Ahead is Uncertain

While Britain’s decision to quit the EU is expected to have a lasting impact on the global economy and regional politics, its direct consequences won’t be known until the government triggers Article 50 of the Lisbon Treaty needed to formally begin the separation process. The Conservative Party has elected a new prime minister, but there is no timetable for when the UK will begin formal negotiations with its European partners.

The path to separation is expected to take a very long time. Article 50 gives both sides two years to complete a new trade agreement, but most experts think it will take much longer. Uncertainty is the bane of the financial markets. In Britain’s case, it could result in a sharp deceleration in the housing market that may actually benefit the United States in more ways than one.

[1] Matthew J. Belvedere and Peter Schacknow (June 28, 2016). “After $3 trillion in post-Brexit paper losses, global markets bounce.” CNBC.

[2] United States Census Bureau. Trade in Goods with the United Kingdom.

[3] Jack Sidders (July 8, 2016). “No Quick Fix to Free $23 Billion Frozen in U.K. Property Funds.” Bloomberg.

[4] Hilary Osborne and Angela Monaghan (July 14, 2016). “Housing sales forecast to fall sharply this summer after Brexit vote.” The Guardian.

[5] Greg Isaacson (July 14, 2016). “Brexit Chaos Could Benefit US Real Estate Markets.” Mingtiandi.com.

[6] Reuters (July 14, 2016). “Brexit vote ravages sentiment in UK housing market: RICS survey.

This article was written exclusively for GoRion.

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This article has been exclusively written for GoRion by...

Sam Bourgi

Sam Bourgi

Sam Bourgi has more than seven years of progressive experience in economic analysis, market research, public policy and the financial markets. He has a broad expertise in the financial markets, including commodities, real estate the foreign exchange. As a published author in both peer reviewed and industry research, Sam has covered topics ranging from mortgage-backed securities to consumer spending and labor. Sam's resume includes more than 40 government and industry publications, thousands of financial articles and hours of educational resources on personal finance and trading.

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