In the first part of this article, we gave some economists' views of the impacts of Brexit to date. In this second and concluding part, we look at some of the economic factors that will affect prospects for investors, and at recent figures that suggest a fast-improving global picture.
Brexit and Consumer Confidence
Feeling financially comfortable is important. The extent to which people feel secure can have a marked bearing on property price trends, and that's one of the reasons why Brexit's effects are so important to investors. However, there are many different factors at work here, and not all of them are pushing the same way.
It would be hard to argue that Brexit hasn't had a damaging effect on most people's real-terms wealth. Some estimates suggest that it has already cost the average worker the equivalent of a week's wages. Partly, this has come from rising inflation, much of which is directly attributable to the post-referendum fall in the value of Sterling. As the Pound lost value against foreign currencies, so imports became more expensive for British businesses and thus, average prices rose. Moreover, prices have tended to rise faster than the average rate of wage growth so, typically, workers and families are feeling poorer.
The FT reports recent findings by the London School of Economics that "with the pound falling about 10% following the June 2016 result, inflation has risen more in Britain than in other advanced economies... The LSE study estimates that the Brexit vote directly increased inflation by 1.7 percentage points of the 2.7% rise in the 12 months after the referendum. And with wage inflation stuck at just over 2%, the increase in inflation caused by the Leave vote has already hurt UK households."
Exchange Rates - Pros and Cons
However, the exchange rate is an ever-changing figure and one cannot suppose that the Pound's value will stay low forever. True, it collapsed dramatically after the referendum, but it has been on an upward trend since the first quarter of 2017. It might be reasonable to suppose that it will climb further once the uncertainty of Brexit negotiations has passed.
For now, no one is expecting Sterling to follow a smooth or predictable path. At the time of writing, the Pound had made impressive gains in recent weeks, but it fell sharply on 31st January. This was the result of a report published by Reuters, saying that the European Commission had rejected a proposal from the City of London regarding a free trade deal on financial services. The prospect of trade barriers in a sector so critical to Britain's economy led to a fall in values against both the Euro and the Dollar.
We can expect some degree of volatility in values between now and March next year but it's important to remember that the world economy is recovering strongly. This is tending to buoy up the British economy, which is now faring better than many economists feared. Against this background, trade is likely to pick up and there is no reason why the Pound shouldn't make a gradual recovery.
In the meantime, there are some advantages to a poor exchange rate. Firstly, British exporters are benefiting because their goods and services are now effectively cheaper to overseas buyers. Secondly, the same is true of those selling or renting British property to foreign nationals. In the wake of the Brexit vote and the consequent fall in Sterling, many foreign investors were quick to invest in British property. Since then, investors with interests in student property have also seen rising demand on the part of overseas students, for whom an education in Britain suddenly became much more financially attractive.
Inflation and Interest Rates on Property
The value of Sterling, and the consequent rate of inflation are important to investors. Firstly, as noted earlier, inflation has an effect on consumer sentiment. Secondly, the Bank of England has a remit to keep inflation in check and one of its principal tools is the ability to manipulate interest rates.
If inflation rises too quickly - which is a threat here as it is in many other countries - then the Bank's Monetary Policy Committee will feel increasing pressure to raise interest rates again. It has previously signalled that interest rates will rise, albeit at a slow and gradual pace, but higher rates of inflation, and/or unexpectedly strong economic growth could see these rises materialising sooner rather than later. Higher interest rates would have an inevitable knock-on effect on the cost of BTL mortgages and, potentially, the profitability of certain property investments.
However, the current signs aren't especially worrying. Inflation reached a six-year high in November 2017 but the rate has fallen since then. According to a BBC report on 16th January, "The Bank of England has said it thinks inflation peaked at the end of 2017 and will fall back to its target of 2% this year." Moreover, the British economy is certainly in no imminent danger of overheating. Taking both those factors into account, it's probably fair to say that investors need not worry about any large or sudden hike in interest rates.
Thus far, the prospect of Brexit has had some damaging effects upon the UK economy, perhaps to the tune of around 1% of GDP. It has also pushed up prices, so consumers and house-buyers are feeling the pinch. A poorer exchange rate has led to higher inflation, which has added to the pressure on interest rates. However, none of these effects are devastating, and nor will they last forever. Whatever one's views on Brexit, Britain's departure from Europe is unquestionably coming, and the roles of government and business leaders are now to make the most of the opportunities ahead. As negotiations progress, so we will see an end to much of the recent economic uncertainty and, in that respect, the conditions for investment must improve.
In any event, one must also take account of a strongly recovering global economy. In January 2018, the World Bank revised it growth forecast upwards, saying it expects: "global economic growth to edge up to 3.1% in 2018 after a much stronger-than-expected 2017, as the recovery in investment, manufacturing, and trade continues."
In November, Goldman Sachs had expressed a similar sentiment, saying: "For the first time since 2010, the world economy is outperforming most predictions." It predicted "4% GDP growth next year, supported by still-easy financial conditions and fiscal policy.... The strength in global growth is broad-based across most advanced and emerging economies." In January, the IMF projected a similar figure, saying: "Global growth forecasts for 2018 and 2019 have been revised upward by 0.2 percentage point to 3.9%. The revision reflects increased global growth momentum."
Whether or not it's true that British GDP has dropped 0.9% as a result of Brexit, this figure could be more than counteracted by natural economic growth. In or out of the EU, Britain will remain a part of the world community. Trade will continue and the rising fortunes of other countries should soon percolate down to our own economy. In other words, there are credible grounds for optimism.
And besides all that course, there are the domestic forces that, regardless of Brexit, will continue to provide property investors with a firm foundation. Demand for housing still far exceeds supply, employment rates are high and yields remain broadly good, provided that one makes sensible choices about property type and location. What's more, properties remain unaffordable for many buyers, so the private rental sector still stands as the only practical option for millions.
For all these reasons and more, UK property looks set to remain a robust and resilient vehicle for investors during the years ahead. Intelligent, informed choices will be required in order to earn the best returns but in certain parts of the North West, the Midlands and elsewhere, there will continue to be some excellent opportunities.
To read our first piece on Brexit, click here to read an economist's view of the property market and brexit.