How Will Brexit Affect Home Prices and American Real Estate?
“Brexit,” a portmanteau of the words “British” and “Exit,” refers to the exit of the United Kingdom (UK) from the European Union (EU) on June 23, 2016. Despite the favoritism the move has received from many, Brexit also has some significant detractors.
Brexit sent shockwaves around the world when the referendum resulted in the “Leave” campaign’s success. Within hours, stock prices plummeted and financial markets around the world were feeling its effects. The United States and the United Kingdom have a long and complex history of interdependence, with both Britons and Americans crossing the pond in search of greener pastures. With the UK less intertwined in the European Union’s economy, what will this mean for UK investment in the American economy? Specifically, how will Brexit affect house prices and the US real estate market?
History Repeats Itself Quickly
British Prime Minister David Cameron, who petitioned for the UK to remain in the EU, will step down in October 2016 due to his country’s historic move toward what some see as increased liberty and freedom. In addition, the UK remains divided along class, race, and geographic lines due to the “Leave” campaign and the “Remain” campaign that precipitated the UK’s decision to leave the EU and pursue socioeconomic and geopolitical autonomy.
While this marks the first time a constituent nation of the European Union will leave by popular referendum, this is by no means the first time that the United Kingdom is experiencing a secession crisis. As recently as 1921, which isn’t too long ago in European history, the United Kingdom ruled Ireland and enjoyed significant control over its sister nation’s economy. While most Irish citizens wanted British rule of Ireland to end, not everyone supported Ireland’s secession from the UK.
Similar to contemporary concerns about the United Kingdom without EU-backing, some worried that Ireland would have trouble stabilizing its economy, which was propped up partially by the UK’s economic interest in Ireland.
Most of us have heard the famous maxim, “History repeats itself.” This is what seems to have happened with Brexit. Like Ireland almost 100 years ago, the United Kingdom has opted for economic independence and said goodbye to the fiscal interdependence that occurs among nations in the EU.
After Ireland was officially free from British rule, it took a while for the nation to regain economic traction. Following Brexit, the UK may experience the same phenomenon, although surely to a lesser degree.
The UK isn’t as economically strapped as Ireland was when the latter became independent, nor was it “ruled” by the EU in the sense that the UK presided over Irish political and economic affairs. Furthermore, Britain has the opportunity to pursue financial opportunities without seeking approval from the EU, which could produce some lucrative, new trade agreements.
Because the value of the British pound dropped significantly following Brexit, the UK’s industries will inevitably be affected. One industry where the pound’s decline is sure to be felt strongly is real estate. But how will Brexit affect the real estate market on the U.S. side of the Atlantic? What’s likely to happen as a consequence of the changes? Let’s take a look.
Impact on American Real Estate
In the wake of Brexit, the British pound has lost significant value, and the currency’s decline encourages investors to put a replacement currency in their basket — at least for now.
According to a February 2016 report from The Guardian, “The pound has [reached] its lowest point against the US dollar in almost seven years.”
This can be beneficial for Americans who wish to invest in British products and services. However, the fact that the DOW closed 900 points lower just two days after the announcement of Brexit gives us some insight into how much the event impacts the global economy.
There are plenty of opinions concerning the long-term effects of Brexit on U.S. real estate, but some effects can already be felt. How does Brexit affect house prices and American real estate right now? There are five major ways.
1. Lower Mortgage Interest Rates
Mortgage rates had already scraped the bottom of the barrel not long before Brexit occurred, explains Svenja Gudell, chief economist at Zillow. Now, thanks to Brexit, the rates are plummeting even further. This is good news for homebuyers who could afford to buy the home they really want, if only their home loan interest rate were lower.
Most real estate professionals call the current U.S. real estate market a “seller’s market” — a market that makes it more profitable to sell a home instead of more profitable to buy one. With that said, how does Brexit affect house prices helping turn our real estate market into a “buyer’s market,” as it was when the recession was at its peak.
That last fact is important to remember since low-interest rates from lenders typically signify that the economy in which they lend isn’t very robust. It’s usually well-heeled investors who are pleased to see interest rates rise, but all of us should be glad to see interest rates rise a bit due to its suggestion about our overall economic strength.
2. Americans Moving to the UK
Not long ago, selling a house in the U.S. and buying one in the UK gave you the short end of the stick when it came to currency conversion. At the time of this writing, the British pound is still more valuable than the American dollar, but the margin isn’t as wide as it was a few years ago.
According to an August 2016 report from the San Francisco Chronicle, “The British pound is up by 0.7% at 1.3089 against the dollar after the latest numbers from the National Institute of Economic and Social Research showed that growth in the UK was up 0.3% in the three months up to the end of July.”
3. U.S. Gateway Cities
So-called “gateway cities” are often thriving metropolises that have international acclaim. This makes them highly attractive to wealthy real estate investors, who see the cities as ideal entry points into another country’s culture. It’s also a characteristic of gateway cities to have stable housing markets, where home buyers feel exceptionally confident purchasing real estate.
London has long been considered one of the world’s premier gateway destinations, but the financial uncertainty that attends the British housing market following Brexit makes the city less attractive as a gateway city. This means many real estate investors will be scouring non-British gateway cities for attractive properties to purchase. With this in mind, how will Brexit affect house prices in other gateway cities?
Consequently, the following U.S. gateway cities could see a significant uptick in the purchase of residential real estate: New York, San Francisco, Los Angeles, and Seattle. Other North American cities that could benefit from the gateway city phenomenon in the wake of Brexit include Boston, Chicago, Dallas-Fort Worth, and San Diego.
4. Increased Luxury Home Value
When global real estate investors decide to inhabit a gateway city, they typically buy a piece of property — or multiple pieces, as the case may be — that have luxurious architecture and interior design. In consideration of the British pound devaluing so drastically, how will Brexit affect house prices for luxury market?
No. As more foreigners look to the U.S. for gateway city destinations, competition in the luxury home market will increase, so will the sale prices of luxury homes in gateway city destinations. Some of the most unique properties could easily sell for pre-recession prices.
5. Potential Buyers Staying in The UK
Due to the effects of Brexit and differences between how British and the American real estate markets work, it isn’t just expensive for Americans to move to the UK; it’s also costly for them to move stateside. “If a typical British buyer were to purchase a typical home in the United States, it would actually cost them £10,000 more, just from Thursday until now,” says Svenja Gudell of Zillow.
At the moment, the British pound and American dollar may be similar in currency exchange rate, but moving from Britain to the U.S. is still an expensive prospect that keeps many citizens in the “old country,” without serious thoughts of ever taking up residence on the other side of the Atlantic.
The Outlook From Here and Now
Understanding the full range of benefits and drawbacks of Brexit will take years. But investors who understand our real estate market well enough have a clear view of the horizon that Brexit moves us toward. Such experts may also best answer how will Brexit affect house prices?
In a recent interview with Houston Agent Magazine, business owner and mortgage note investor Abby Shemesh was asked: “If you could, speculate a worst-case scenario for what Brexit could mean for the country’s residential real estate market?”
Shemesh answered, “As far as real estate, I don’t really see a terrible downside on U.S. residential real estate in the near future. But the worst-case scenario would be if global markets are severely affected to the point that foreign money dries up and investment stops coming into the U.S., and then big cities and medium-sized cities start to plateau, as far as property values, or even decline in price as well.”
There may be one less star on the EU flag now, but its absence doesn’t spell doom for the U.S. real estate market. In fact, there are plenty of positives to focus on, just as there were when our political ancestors decided to leave Britain and came to America to experience greater autonomy.
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