Brexit brings uncertainty to the world economy

Private Property South Africa
Lea Jacobs

The decision by the British public to leave the European Union has caused carnage in the world’s financial markets.

Various campaigners throughout Britain have been driving the decision to leave the European Union (EU) almost since Britain first joined the Common Market in 1973. Politics, the migration factor and the fact that the country’s prime minister, David Cameron, failed to negotiate limiting the number of migrants flooding into the UK all played a role in the vote to leave the EU.

Tensions grew as the ‘leave’ and ‘remain’ camps upped the ante, but overall, the general feeling was that Britons would vote to remain. The ensuing shock when the polls revealed the ‘leave’ camp had secured 52% of the vote essentially caused a tsunami on the global equity markets and led to the British pound dropping radically against the dollar and, ultimately, led to the resignation of David Cameron.

At the time of going to press trillions had been wiped off global equity markets and the pound had dropped to a 31-year low. There was a general feeling of panic as economists predicted that the Brexit vote would push the UK into recession. Although Britain’s Chancellor of the Exchequer, George Osborn, attempted to calm the chaos caused by the withdrawal by stating that the British economy ‘is in a position of strength’, this didn't prevent Standard & Poor stripping the UK of its final AAA rating or Fitch downgrading it from AA+ to AA.

Before the vote, economists had predicted that an exit vote would be economically devastating for the country and while it's still early days, no one can argue the carnage the markets have experienced since the announcement. Understandably, there's a great deal of uncertainty around what will happen in the medium and long term because no one can predict how long it will take for the withdrawal to take place, what sort of trade deals the UK will be able to forge with the rest of the European Union and what impact this will have on both European and UK businesses.

The property market felt the effects of the fallout immediately, with a number of London estate agents stating that numerous deals had been cancelled on the back of the decision and that foreign investors were already circling the waters in the hunt for a bargain.

The panic is perfectly understandable given that something of this nature has never happened before and at this stage all the markets are navigating unchartered waters.

Interestingly, but most likely due to the amount of foreign investment, the average price paid for a property in the nation’s capital dropped by £971 in the weeks leading up to the referendum. The average paid in the rest of the country rose by £2 320 during the same period.

Miles Shipside, a director with one of the UK’s largest estate agencies, Rightmove said, “Markets typically dislike uncertainty and London’s fall in prices seems to be in line with what one would expect, though for some reason it is out of kilter with the rest of the country.”

The treasury has predicted that house prices could drop by as much as between 10% and 18% over the next three years. However, it needs to be stressed that no one can predict future repercussions of this unique situation, so it remains to be seen what will happen in the coming months and years.

It's still early days and while the drop in prices may be of concern, it certainly isn't a death knell for the London market considering just how well the capital’s property market continued to perform when other markets in other areas virtually collapsed during the 2008/9 economic downturn. Surely, if it could survive that, it can survive anything that leaving the EU could possibly bring.

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