The Brexit pitfall – The housing market

 

Photo credit: KiwiDandy

Stemming from the Brexit, the main consequence for Great Britain will be the drop in value of the GBP. Brexiters often argue that this is not a problem and it could even be positive. Their line of reasoning lies on the assumption that a drop in value of the GBP will result in higher exports, which stimulates the economy.

I wouldn’t be so sure this will be the actual outcome. I believe that other factors will enter into play. For starters, home prices in England have been very high. The real estate in England has benefitted from a self-reinforcing cycle. After the subprime crisis, the market was attractive for foreigners adding demand which made the prices soar and worked as a virtuous cycle where rising prices attracted more investors.

Exiting from the EU will result in lower demand for British real estate. This will push prices down in a definitive basis by destroying the current virtuous cycle. A rising housing market is a fundamental part for consumer spending. Depressed assets mean depressed credit, which means lower consumer spending and, finally, lower GDP. If the exports do not grow fast enough to compensate the lower internal consumption, unemployment will rise.

Therefore, In the short term, we have all the ingredients for a banking crisis. In the long term we might have improved exports. There’s just too much downside.

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