Real Estate

Nir Kaissar is a Bloomberg Gadfly columnist covering the markets. He is the founder of Unison Advisors, an asset management firm. He has worked as a lawyer at Sullivan & Cromwell and a consultant at Ernst & Young.

There are a lot of things to dislike about Brexit, and opponents have been abundantly clear about many of them. But even the most hardened "Bremainer" must admit to at least one silver lining: Anything and everything can now be blamed on Britain's vote to quit the EU.

Slow growth? Blame Brexit. Ineffective monetary policy? Brexit. Beaten-down banks? Brexit. (Never mind that all of those problems have been around for years.)

Now comes news that London house prices have fallen for five consecutive months through August, hitting the fanciest neighborhoods like Kensington and Chelsea the hardest. Land Registry data show that in the five months since April the number of transactions in the capital fell 78 percent from the year-earlier period.

At least some of this is probably due to an April hike in property taxes. But it’s only a matter of time before this latest news is blamed on Brexit too.

In fact, one real estate broker, Savills Plc, is getting ahead of the game by predicting that London’s luxury homes will tumble 9 percent this year as a result of Brexit. They’re not the only ones who seem alarmed. After the vote, investors in U.K. property funds rushed for the exits. Many folks, it seems, are bracing for a drop in British real estate.

Yet there isn't even universal agreement that London’s housing market is stumbling post-Brexit. The Nationwide House Price Index London, for example, rose 0.5 percent in the third quarter. It's also up 4.1 percent this year through September. There’s also evidence that the market across the rest of the country is holding up. The broader Nationwide House Price Index rose 1 percent in the third quarter, and is up 4.7 percent this year.

Granted, mere months have passed since the Brexit vote and prices may indeed tumble if the economy tanks and bankers up sticks, but that outcome still isn't certain. 

Still, you can understand why U.K. homeowners might be nervous. Property is a British obsession -- and historically it has been a goldmine. The Nationwide index has returned 7.6 percent annually since it began in January 1953. Londoners have done even better. The London index has returned 8.8 percent annually since January 1974, the earliest date where data's available.

Consider how Americans have fared by comparison. The S&P CoreLogic Case-Shiller U.S. National Home Price NSA Index has returned 4.9 percent annually from February 1975 through July.

Some of the British premium may be justified. The U.K. is a small island, and a restrictive zoning system has created a housing shortage. But an annual premium of 2.7 percent for homeowners relative to their American cousins, or 3.9 percent in London, looks generous.

Here’s the surprising thing not obvious in the long-term data: The U.K. market was slowing for years -- long before Brexit.

One way to see this is to look at rolling ten-year annual appreciation of U.K. homes. The Nationwide index’s rolling ten-year returns have averaged 8.6 percent annually since 1962, but you’d have to go all the way back to December 2008 to find a ten-year return that exceeds that long-term average. In fact, the index’s ten-year returns have gradually declined since 2008, and the most recent ten-year return was just 2 percent annually.

Home Sweet Home
The rolling ten-year returns from U.K. homes are way down since 2008
Source: Bloomberg

The capital has suffered the same as the national market, but to a lesser extent. The London index’s rolling ten-year returns have averaged 8.7 percent annually since 1983. Here too, the last time the capital’s ten-year return exceeded that was December 2008. Its most recent ten-year return was 6.2 percent annually.

So add declining returns from U.K. home-ownership to your list of undesirables that long preceded Brexit.

Slowing home price appreciation isn’t exclusive to the U.K. The Case-Shiller index’s rolling ten-year returns have averaged 4.5 percent annually since January 1985. And you have to go back to March 2009 to find a ten-year return that’s higher than that long-term average. Oh, and the ten-year annual returns for the Case-Shiller Index have been negative since August 2015.

House Blues, Revisited
As in the U.K., rolling ten-year returns from U.S. homes have declined for years
Source: S&P Dow Jones Indices

Someday soon, you’re going to hear about the disappearing riches from U.K. home-ownership. When that happens, don't put all the blame on Brexit. It already has enough on its shoulders.

 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Nir Kaissar in Washington at nkaissar1@bloomberg.net

To contact the editor responsible for this story:
Timothy L. O'Brien at tobrien46@bloomberg.net