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What does Brexit mean for Australia’s housing market?

The United Kingdom’s referendum and resulting vote to leave the European Union had world markets reeling as people tried to work out the ramifications. So what does it mean for Australia’s property market?

savethousands_may2016_set_a_320x50-dOn June 23, the United Kingdom held a referendum on whether or not it should leave the European Union, following a movement that was largely driven by the issue of immigration: that is, those that wanted the UK to leave the EU felt the country should have more control over who entered. In voting to terminate the free movement of people across their borders, the “leave” voters also elected to forgo their current financial, trade and economic freedom within Europe. While the vote was close, the “leave” camp won over the “remain” camp and in the time since, there has been much volatility and uncertainty.

The longer-term effects of what has been called “Brexit” remain to be seen but in the short term there is likely to be weaker economic growth in the UK. This weaker growth may indirectly benefit Australia’s property market, especially when combined with the fall in the value of Britain’s currency, the pound sterling. For one, slowing growth may encourage Australian expatriates to return home because of the lack of opportunity and two, the falling currency will make working in the UK and saving money to bring home with them a less attractive option for Australians.

 

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This combination of expats returning home and locals staying put should increase the demand for housing in Australia and also provide more buyers for the current supply of new apartments coming onto the market.

Macquarie Bank analyst James McIntyre backs this scenario and says potential faster population growth in Australia as a result of Brexit means there is now the “potential for a less negative house-price outlook”, especially alongside lower interest rates.

“A weaker growth outlook for the UK and Europe could see a return of Australian expats, and a decline in the number of Australians seeking better opportunities offshore,” a note from Macquarie said.

 

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The uncertainty created by Brexit may also have a positive effect on Australia’s commercial property sector. REA Group chief economist Nerida Conisbee says Australia tends to attract a lot of global capital for commercial property and in many cases would compete with Europe for it. “With the level of uncertainty now in Europe and Britain, Australia will now look even more attractive for commercial property seekers,’’ Conisbee said.

She said this is because Australia’s high level of stability, economic growth and low sovereign risk had given it a reputation as a “safe haven’’ for investment. She added that our residential property market might also benefit if Asian property buyers turn away from the UK and look towards more stable locations for their investments.

One thing to consider is that if global uncertainty continues following the referendum and during the process of the UK exiting the EU, this could have a flow-on effect to confidence in all markets, including Australia. This may mean a rise in bank borrowing costs, even if the cash rate remains low, which could feed into the cost of mortgages.

 

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It is also interesting to note how the Reserve Bank of Australia responded to Brexit in its recent statement. At its July meeting it kept the cash rate on hold at 1.75% and its statement provided little focus on the UK referendum.

It did state that any effects of the referendum outcome on global economic activity “remain to be seen and, outside the effects on the UK economy itself, may be hard to discern”.

Looking ahead, RBA Governor Glenn Stevens noted that upcoming information should allow the Board to “refine its assessment of the outlook for growth and inflation and to make any adjustment to the stance of policy that may be appropriate”.  The door still appears to be open for an August rate cut.

While the immediate effect of Brexit appears to be uncertainty and volatility, there is the potential for Australia’s property market to benefit, especially as investors move out of equities and into other assets they consider safer – such as property.

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Gayle Bryant

Gayle has been a financial and business journalist and sub-editor for almost 30 years. She has written for a wide range of newspapers, magazines, custom and trade press and websites. Gayle’s articles regularly appear in the Sydney Morning Herald’s small business section and the Australian Financial Review’s special reports section.

The opinions expressed in this article are the opinions of the author(s) and not necessarily those of Homeloans Ltd.