London was once considered a haven for property investors. They were confident about finding a secure investment that was barely affected by changes in market prices. This perspective has changed over the years mainly due to the recent Brexit vote.
Is this the time for overseas investors to buy UK property?
A crisis also creates opportunities. So say many pundits, often citing the supposed, but inaccurate, translation of two Chinese characters representing the English word, one signifying ‘danger’ and the other, ‘opportunity’.
Similarly, two questions underlie the one posed in the title of this article. First, is the UK in danger now? And, second, does that provide overseas investors with an advantageous buying opportunity in UK residential property?
For an answer to the first, let’s start with this picture.
With annual growth persistently below a feeble 2% for the past seven years, it has never been a pretty view, but the economy actually shrank in the second quarter of this year for the first time since 2012.
If the current quarter repeats this trend, as seems probable, it will constitute a recession, technically defined as two consecutive quarters of decline, although consumer buying in fear of Brexit-triggered shortages might just push growth back into marginally-positive territory. Whatever the third-quarter result, the UK economy is clearly pinched.
The next graph tells a similar story. It tracks the rate of change in UK house prices. This is more significant than the absolute level of values. An estate agent, desperate for business in an inactive market, may argue that prices are up 1%, or more, over the past 12 months. That may be true, even since May when this graph was drawn, but the rate of growth is clearly less than a third of what it was prior to the Brexit referendum in June 2016. That’s the important point.
Finally, there’s this picture. Arguably, the exchange rate is the key measure for most overseas investors, for whom sterling’s price against the dollar is the most immediately visible evidence of how the UK economy is faring.
The time is now?
All three of the selected danger indicators are flashing red, therefore. Moreover, the pace of their decline has been accelerating. Sterling, for example, has fallen by a further 3.7% since Boris Johnson became the new UK prime minister on 24th July.
In the short-term, such steep falls should result in some leveling-off, even a recovery, especially in sterling. Additionally, the Johnson administration has indicated there will be a special budget this autumn. Sajid Javid, the chancellor, is expected to announce a variety of measures designed to implement the prime minister’s vow to “turbocharge” the economy ahead of an expected no-deal Brexit.
All other things being equal, that might indicate this is a good time for overseas investors to pre-empt that possible recovery and to dip a toe, at least, in UK residential property.
The trouble is, all other things are far from being equal.
Troubles, troubles, troubles
There is a tendency, especially among Remainers, to view the UK’s Brexit problems in isolation. (Which is not to say that Brexiteers aren’t also prone to this ostrich attitude, particularly when regaling the supposed benefits of leaving the EU.)
As this blog has noted previously, the UK faces an array of troubles unrelated to Brexit. Among the most worrying are developed economies that aren’t responding to trillions of dollars in monetary support by central banks; rising geopolitical risks; record levels of household and corporate indebtedness; negative interest rates on a quarter of the world’s bonds; the growth of hard-right political groups; trade wars; income inequality; and, of course, climate change.
In many ways, Brexit is just a local expression of these trends. Even if, by some miracle, its damaging effects on the UK economy were to be overcome in the next few months, the other worries will continue to deter investors’ appetite for new ventures, including UK property.
Been down so long
The world has seen a decade of weak growth, falling interest rates, and rising international tensions. At some point, the bad news will end. On past experience, that should be when the news is at its absolute worst and investors are at their most universally pessimistic.
However, when quantitative easing (QE), as the past 10 years of unprecedented central bank support is known, has distorted prices for housing, shares, bonds, and virtually every other asset, how reliable are the traditional types of signals given by the markets?
Precisely because the circumstances of QE are so unprecedented, there’s no answer to that. The markets continue to be ruled by plastic monetary policy, not by the iron laws of investors’ supply and demand.
Over the past couple of years, the authorities reduced their level of support as a gradual but sustained recovery in growth began to push up wages and prices. Recently, however, that uptrend has stalled and the possibility of a recession has become the dominant concern.
Governments have responded with declarations of firm intent to keep the economic ball rolling with yet more QE, yet lower interest rates. Investors have heard it all before. They show signs of, if not outright disbelief, certainly of increasing anxiety that the strategy won’t work when interest rates are already so low, or even negative.
Even so, the current pause in both UK house prices and transaction activity may well enjoy an uptick, either before or, more likely, after Brexit happens on 31st October. Whatever the economic outlook, people still need homes, but buyers are said to have been holding off in the expectation that prices will decline further as the date approaches.
It is, therefore, genuinely possible that, once the break with Europe has actually occurred and the related uncertainties are past, those potential buyers will take the plunge and prices will resume their advance.
Remove this doubt
That’s as optimistic as one dares to be. It’s not that gloom prevails, but doubt – and that is the bane of investors. With so much of it around, it would be foolish, rather than brave or contrarian, for an overseas investor to take on the major commitment of a property purchase until at least some of the clouds have evaporated.
Whether that greater clarity could come after Brexit depends, not just on events in the UK, but also on economic and political developments around the world.