The U.K. property market is one of the most dynamic and important sectors of the country's economy. It is a vital source of investment and wealth creation, and it plays a crucial role in the overall health of the country’s balance sheet. However, the U.K. property market is not an isolated entity; it is influenced by a range of global economic factors, one of the most significant of which is the U.S. economy.
In this blog, we will explore the ways in which the U.S. influences the U.K. property market. We will examine the historical context of the relationship between the two economies, as well as the current situation. We will also discuss the key factors that shape this relationship and the implications for investors and businesses that operate in the U.K. property market.
The historical context of the relationship between the U.S. and U.K. economies is significant in understanding how the U.S. economy influences the U.K. property market. The U.S. has long been a major trading partner of the U.K., and the two countries share a common language, legal system, and cultural ties. America has also been a major source of foreign investment in the U.K. property market, with state-side investors playing a significant role in the development of the sector.
During the 1980’s, the U.K. property market experienced a boom that was largely driven by the deregulation of the financial sector and the availability of cheap credit. This boom was also fuelled by U.S. investors, who saw the U.K. as an attractive investment opportunity. However, the boom was short-lived, and the market experienced a sharp downturn in the early 1990’s. This was partly due to the collapse of the U.S. savings and loans industry, which had a ripple effect on the global financial sector. Since then, the U.S. economy has continued to play a significant role in the U.K. One of the key influences is via the exchange rate. The U.S. dollar is the world's primary reserve currency, and changes in its value can have a significant impact on the value of other currencies, including His Majesty’s British pound. When the value of the U.S. dollar rises, the value of the pound falls, which can make U.K. property more attractive to foreign investors, including those from the U.S. We have experienced this most recently. with an influx of U.S. residential and commercial buyers purchasing and leasing.
Market overpricing interest rate hikes…One key theme highlighted is the U.K.’s interest rate expectations.
The market may be overly optimistic about future rate hikes, given the already tight monetary policy stance in the U.K.
Sonia (sterling overnight index average) is priced for close to two 25bp rate hikes, whereas the traders expect one at most, with a high-risk rate have already peaked, in line with recent MPC comments.
This suggests that the market may need to adjust its expectations for the future path of interest rates in the U.K., which could impact the GBP/EUR and GBP/USD exchange rates.
Exchange rate forecasts:
For GBP/USD, to fall to a low of 1.13 in the short term (1-3 months).
For EUR/GBP, to rise to a near-term peak of 0.92. This converts to a GBP/EUR forecast of approximately 1.087.
U.K.’s financial imbalances may require currency depreciation...
In the medium term (6-12 months), the analysts highlight the U.K.’s financial imbalances as a key theme.
The U.K.’s current account deficit is trending at around 5% of GBP, which is like the levels seen in the us in the early 2000’s.
The current account deficit is trending at around 5% of GBP, though recent data have been affected by large recording errors, and although it has been readily financed through equity sales, the outperformance of U.K. equities in 2022 was driven by GBP lethargy.
This suggests that the U.K. may need to attract foreign inflows to finance its deficits, which could require a relative cheapening of U.K. assets via the currency.
In addition to the impact of the U.S. economy on the U.K. property market, there are also several other factors that shape this relationship. One of the key factors is government policy. Both the U.S. and U.K. governments have a significant impact on their respective economies and can shape the conditions that influence the U.K. property market. For example, changes to tax policy, immigration policy, and trade policy can all have an impact on the U.K. property market.
The collapse of Lehman’s during the global financial crisis in 2008, the bank bail-out and run on some financial institutions had a significant impact on the U.K. property market, leading to a sharp decline in property prices and a decrease in demand. There were however a small number of micro markets in London that saw an upsurge in capital value as investors bailed out of the capricious currency markets are headed for the relative safety of bricks and mortar. During this period, we saw an increase of around 25%, for a period of 16 weeks.
Another implication of the relationship between the U.S. economy and the U.K. property market is that investors and businesses need to be aware of the currency exchange rate.
The value of the U.S. dollar can have a significant impact on the value of the pound, which can in turn affect the value of U.K. property. If the value of the U.S. dollar rises, U.K. property may become more expensive for foreign investors, which can lead to a decrease in demand and prices. A decline in the U.K. property market can lead to a decrease in construction activity and a decline in employment in the sector.
However, opportunities can be presented for investors and businesses. Changes in U.S. interest rates can have an impact on the availability of capital for U.K. property investments. If U.S. interest rates are low, this can make it easier for U.K. investors to access capital and invest in the U.K. property market.
Overall, their relationship is complex and multifaceted. There are a range of other factors that also shape this bond. For investors and businesses that operate in the U.K. property market, understanding this relationship and its implications is crucial for making informed decisions and managing risk.
Before printing, think about your environment. Please note any advice contained or attached in this document of future reports or emails, or in previous correspondence, is informal and given purely as guidance unless otherwise explicitly stated. Our views on price are not intended as a formal valuation and should not be relied upon as such. They are given during our estate agency role. No liability is given to any third party and the figures suggested are in accordance with Professional Standards PS1 and PS2 of the RICS Valuation – Global Standards 2017 incorporating the IVSC International Valuation Standards issued June 2017 and effective from 1 July 2017. Any advice attached is not a formal ("Red Book") valuation, and neither Juszt Capital nor the author can accept any responsibility to any third party who may seek to rely upon it, as a whole or any part as such. If formal advice is required, this will be explicitly stated along with our understanding of limitations and purpose. Whilst all efforts are made to safeguard emails, Juszt Capital LTD cannot guarantee that attachments are virus free or compatible with your systems and does not accept liability in respect of viruses or computer problems experienced. Juszt Capital LTD reserves the right to monitor all email communications through its internal and external networks.
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