Brexit, property and currency: 3 thorny issues for expats
Written by Ben Johnson on 4 October 2017
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For many expats, Brexit has been both a blessing and a curse, depending on where their income lies and – crucially - in what currency their savings are held in. The decision on the 23rd June 2016 to begin formal proceedings to withdraw from the European Union immediately caused a drop in the value of the pound versus most of the major currencies, notably in the dollar and the euro.
This, of course, had a noticeable impact on many peoples' incomes, particularly those relying on pensions or fixed assets based in United Kingdom. People who had a portfolio of rental properties in the United Kingdom, for example, suddenly found that their income plummeted by 10% within a few days if they were in the Eurozone and by around 14% if they were in the United States. It then got worse before it got better, with the pound dropping to $1.20 and nearly reaching parity with the euro.
Of course, those who had income that was mostly based outside the United Kingdom – with the possible exception of Venezuela or Zimbabwe – were less affected. The current weakness of the pound is to their advantage if they wish to visit or invest in the United Kingdom.
The key issue is that expats have a particularly difficult job when it comes to working out where to invest, as currency fluctuations mean that a 10% rise in an investment could be completely negated by a 15% drop in the value of the relevant currency. Stability is usually desirable in investments, particularly in later life when there's less time for fluctuation to iron out. However, when there's stability, there's usually less opportunity to profit.
This creates a dilemma: Do expats invest in stocks and shares, which carry substantial risk, or do they invest in something traditionally considered safer, such as gilts or bonds? There are also EFTs and mutual funds to consider, and some go the traditional route of gold and other precious metals – and there's also EFTs for those.
But there's another route that they could consider: property.
What's Happened to the Property Market Since Brexit?
Property is often a good indicator as to the current state of the economy. The reason for this varies, but it's typically because to buy a house, people must have:
- Appropriate income
- A reasonable record of dealing with debt
- Confidence in the future
Although the decision to buy a house is very much an individual one, the total results can be aggregated to give a broad idea of overall consumer confidence in the economy.
Traditionally, house prices in the United Kingdom have rarely dropped on a national scale, with the possible exceptions of severe recessions and when sterling crashed out of the Exchange Rate Mechanism in 1992.
When house prices drop, it's usually because the rate of repossession has gone up and people are less able to make payments. The banks repossess those properties and sell them at a loss, causing a glut of lower house prices. In a similar vein, people are less likely to sell houses voluntarily, causing some market stagnation, as they believe they risk losing money on the transaction. This is especially true for investment properties and developers.
House prices, however, generally remain relatively stable regardless of currency fluctuations and even fluctuations in the stock market. This is because the United Kingdom is still considered a desirable place to live, and due to the restrictions placed on land use, the supply of buildable land is getting lower and lower. This pushes prices higher as more people come into the country, whether through birth or through immigration.
The YOPA Research
Estate agent YOPA took a variety of predictions regarding house price rises made at the beginning of January 2017 and averaged them out to create an overall prediction. It produced a figure of 1.2%, which reflects a relatively stagnant market. At this point, any gains would more or less be wiped out by inflation, as the annualised consumer price index rise in January 2017 was 1.8%.
For expats in the Eurozone, buying a house in the United Kingdom in January 2017 would have looked like a losing proposition, especially as the pound was fluctuating quite wildly against the euro. The same applies to those in the United States.
However, the Office for National Statistics showed that house prices had risen by a whopping 3.8% by July 2017. This means that should this trend continue, house prices will have risen by more than 7% by the end of December 2017.
While it may seem like a facetious answer, very few people know what the terms and conditions of any Brexit agreement will likely be, particularly given that there is significant political and social pressure on both sides to ensure that each party gets a "good agreement" – but what is good for the European Union may not be good for the United Kingdom and vice versa. In addition, the whole European Union infrastructure still remains: the customs agreement, free movement and passporting rights for financial institutions.
This may mean that the United Kingdom economy ends up sinking, and a sudden, sharp decrease in house prices will be a good indicator that there is something wrong with the economy. Conversely, the United Kingdom could end up in a stronger position, although this seems less likely given the reduced influence it would have on its own. However, investing in property is always a long-term deal, and although it's been rendered less attractive thanks to the various measures passed in the last few years, it's still worth considering.