Popping out some thought bubbles about what Brexit means for Australian property.
The interesting thing that Brexit has shown us is that uncertainty makes noise.
The Brexit vote was unexpected, and since it is only ‘advisory’ – i.e it offers no guide to parliament about how Britain should 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 tell any story you want. I could say that I reckon 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 120 miles west into international waters, leaving Europe only in a geographic sense.
That might be 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 will parliament follow through on the “will of the people”?
And 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. “We don’t want to deal with the refugees thanks, but actually we would like access to your markets, please. And cheese.”
Not that that seems likely either. European leaders could be worried that Britain is the first domino to fall in a failing European project. Already people are talking about Frexit in France and Nexit in the Netherlands. Italeave is not far off.
So they will probably feel a need to ‘send a message’. If you’re out, you’re out. Leave the key in the letterbox and get lost. Don’t think you can cherry-pick over the arrangements you like.
And don’t think you can rock up here at 3am after a night on the town, looking for a bit of ‘company’. If you want it then you shoulda put a ring on it.
This is not going to be an amicable divorce. The lawyers are going to get involved. Everything from tourist visas to foreign exchange markets will need to be revisited and renegotiated.
Europe’s Italian grandmother wants it to take England for everything it’s got.
This is a mess that’s going to take years to clean up.
And as the uncertainty lingers, it adds another swing factor to international markets. Global markets were already volatile. But this makes things even worse. Forget about the short-term swings we saw over the weekend, which were actually pretty tame. It’s going to be felt over the long run.
Because every time we have some sort of “event” – a currency crisis somewhere, or a debt-default somewhere else, the question will 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’s big cheese if they’re cut off from Europe (and they could well lose their place to another European centre.)
So financial ructions are likely. Australian banks are particulary 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 is probably only a risk next time there’s an ‘event’. 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 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 perfectly.
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 means the US. That meant Canada. And it 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 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, I could see all this uncertainty and confusion actually being a good thing for Australian property prices.
In the absence of other information, that’s the line I’m going to be holding.
I’m certainly not going to tip the egg cart just because things are turbulent over in Pommy-land.
What do you think Brexit means?