Brexit & Aussie Real Estate

What Brexit Might Mean for Australian Real Estate?

One of the many things that ‘Brexit’ has shown us is that uncertainty makes a great deal of noise.

The Brexit vote was almost completely unexpected by equity markets and, since it is only ‘advisory’, ie: it offers no guide to the (partially) ‘United’ Kingdom Parliament about how Britain should actually and logistically exit the EU, no one knows what it really means.

That uncertainty – which looks to remain for months (if not years) – creates a lot of room for speculation.  You could just about tell any story you want.

For example, I could speculate that Boris Johnson will become the PM, and then have a change of heart.  Rather than leave the economic community, he’ll move the British Isles approximately 300 kilometres west into international waters, leaving Europe only in a geographic sense.

That might (and hopefully will) be complete nonsense but, right now, it seems as likely as any other scenario on the table.

The Brexit vote was hardly resounding – especially for something as important as it is – and given there were no concrete plans for exit on the table anyway, it’s not clear that any two Britons had the same thing in mind when they went to vote.

So, just a few questions on my mind are these:

• will the UK Parliament follow through on the “will of the people”?;
• if so, how?;
• will it be a ‘paper-divorce’ with all of the trade and legal structures remaining as they are?; or
• will British leaders try and cherry-pick the agreements they keep and bow out of.

For example, “We don’t want to deal with the refugees thanks, but actually we would like access to your markets, please  ………………………  and cheese.”

That doesn’t seem likely either.  European leaders could be worried that Britain is the first domino to fall in a failing European project.  People are already talking about ‘Frexit’ in France and ‘Nexit’ in the Netherlands.  If “Gexit’ ever happens in Germany the EU is ‘a gonner’ – stuffed!

So the ‘kings and rulers’ of the EU will probably feel a need to ‘send a message’  –  and a stern one at that.  For example, “If you’re out, you’re out.  Leave the key in the letterbox and piss off.  Don’t think you can cherry-pick through the arrangements you like.”

And furthermore, don’t think you can rock up here at 3:00 AM after a night on the town looking for a bit of ‘company’.  In the words of Beyonce, “If you like it then you should have put a ring on it!”

At the end of the day, it’s not going to be an amicable divorce.  The money grubbing lawyers are going to get involved and make a meal of it.  Everything from tourist visas to foreign exchange markets will need to be revisited and renegotiated.

This is a mess that’s going to take years to clean up.

And as the uncertainty lingers on it will add another ‘swing factor’ to international markets.  Global markets were already volatile prior to Brexit but this makes things even worse.  Forget about the short-term swings we saw over the weekend after the referendum result was announced – which were actually pretty tame.

It’s going to be felt hard – and over the long run.

Why?  Because every time we have some sort of “event” – a currency crisis somewhere, or a debt-default somewhere else, the question will invariably be, what does this mean for Britain now?

And no one will know, so markets will just take a punt.  Outcomes will be all over the shop.

But can we look through the uncertainty and say something about the likely implications for Australian property?

The downside risks for property come through the financial markets.  London is one of the world’s most important financial centres.  It’ll be truly ‘big cheese’ if London is cut off from Europe – and they could well lose their place to another European centre.

So financial upheavals are likely.  Australian banks are particularly exposed to European financial markets, borrowing quite a bit to fund domestic lending.  So, if we see funding costs go up in Europe, we could see interest rates heading up here.

I don’t see this as likely, and it’s probably only a risk next time there’s an ‘event’ – but European financial markets aren’t as stable as they were.

But there are also a few positives I can see.

Remember that, since the GFC, real estate in Australia has taken on somewhat of a safe-haven status.

That is, as share markets suffered, and the gold bet on a devaluing US dollar went off the boil, investors started looking for solid assets in solid markets.  Australian property fit the bill quite well.

Strong foreign buying, especially from China, has been one of the dominant themes in recent years.

But Australia wasn’t the only property market to elevate to safe-have status.  The world was looking hungrily at mature, stable western economies.  That meant the US and that meant Canada  ………………………  and it also meant England.

But, perhaps, not anymore.

There’s a massive cloud of uncertainty over English property markets now – especially London.  If the London financial centre leaves with Europe, what happens to London real estate prices?

Uncertainty really undermines your real estate safe-haven status.

So, if England is out of the safe-haven league, that means we might see even more safe haven flows heading our way.  That will support residential property prices, as it has done in the past.

It should be noted that some of those flows will also come through larger-fund developer plays, perhaps adding to the heat in current apartment markets.  That might not be quite so welcome.

Anyway, the point is that, on balance, all this uncertainty and confusion might actually be a good thing for Australian property prices.

In the absence of other information, that’s the line I’m going to be holding  ………………………  for the moment anyway  ………………………  until Boris Johnson resigns from politics – leaving a complete vacuum in the office of the British Prime Minister! J

Peter Kerin

28/6/2016