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March 2016

Brexit leaves overseas property owners unsure

Published: Friday 18 March 2016

The starting gun has been fired in the race to vote for Britain either staying in or leaving the EU.
On the 23rd June 2016, Brits will take to the polls to decide on the UK’s EU future. While everyone will have an opinion over whether the risks of leaving the EU are greater than the risks of staying, the following months are sure to be an uncertain time for many people – especially those who already own a property in another EU country, or are even planning on buying one.

Indeed, a recent survey carried out by A Place in the Sun, revealed that 90 per cent of British overseas property owners admit they are not aware of how Britain leaving the EU will affect their current property purchase.

However, in spite of the uncertainty less than half (42 per cent) of those who plan to buy a property said that they were concerned about how a potential Brexit will affect their overseas property purchase, while three quarters said that even if the UK does end up leaving the UK it is unlikely to impact on their decision to buy a property in another EU country.

Of course, one factor that could impact on the way people view a potential house purchase abroad over the next few months, is how the Pound is likely to cope during this unsettled time. After all, houses that previously looked affordable could suddenly become a whole lot more expensive if the Pound suddenly loses – and continues to lose – value.

As soon as David Cameron announced that he had completed his negotiations and was ready to ask the UK public for their decision on Britain's membership of the EU, the Pound fell in value. It then slumped again when Boris Johnson announced he would be pressing for an exit; the added weight of The London Mayor's endorsement being seen as vital to the strength of the 'leave' campaign.

However, the drop in support for the Pound was not an unbridled endorsement for continued EU membership. Currency markets hate uncertainty like nature hates a vacuum and few things are more uncertain than a country deciding whether it wants to change a political situation that has developed over 40 years. Undoubtedly, if Britain votes to leave the EU, there will be a whole heap of renegotiation, restructuring and clarification required by the UK government and by the EU. 

There are many factors that will impact on the Pound’s strength over the coming months. Due to its economic strength, most EU member states would like to see the UK remain a member but this sizeable financial contribution is at the heart of the EU membership debate and yet little is being said about how that money would be spent if it was not being sent to Brussels each year. If there were more certainty over this aspect of a potential Brexit, the markets may look more favourably on the Pound. Good news for investors.

But do the UK Chancellor and the Bank of England really want that?

A weak Pound generally fuels inflation because it raises the cost of imports and that would normally be a reason for the Bank of England and Treasury to try to maintain a strong-ish Pound. However, the weakness in energy and commodity markets and the paucity of demand across the globe means there is virtually no global inflation at the moment. So the major benefit of a weaker Pound, i.e. cheaper prices for British goods overseas, is a very attractive bonus for the UK. The UK economy is already in relatively good form and has weathered the recovery from the mid-noughties financial crash with rather more aplomb than most. So the added assistance of an export advantage is very welcome. Hence the BOE is not panicking at the sight of a 10 per cent fall in Sterling's value.

The scene is set for a lot more speculation and a great deal more spin in the debate over Britain's relationship with the EU – let’s face it, no one is currently sure what a leave vote would really mean for the UK’s relationship with other EU countries.

This speculation and general uncertainty will bring increased volatility and a significant rise in the frequency and magnitude of the spikes and troughs in the value of the Pound. Those extremes of the exchange rate movement are all opportunities, not only for speculators but for those who need to physically deliver currencies to purchase a property abroad.

So whilst the sheep-like traders and investors are doing their thing, a cool head and some considered planning will offer all sorts of advantages to those who can keep their heads when all around are losing theirs.