The most important economic news of last week concerned the United Kingdom referendum, which supported a departure of the U.K. from the European Union (Brexit). This political action has caused stock market declines and a fair amount of concern about the health of the global economy. How does housing and home building fit into this set of impacts?
I think it is useful to consider three sets of possible effects: financial, economic, and political. Taken together, while stock markets will decline over the short-run as investors rebalance portfolios, liquidity in credit markets is doing well and, with the exception of the effects from uncertainty, the economic impacts on U.S. home building activity should be minor.
First, financial market investors are clearly concerned, but there is little risk of a larger financial crisis. Volatility in both asset prices, as investors re-price risk, and currency markets have significantly increased short-term uncertainty. However, with respect to housing these financial effects can counter-intuitively ease housing finance and lending conditions. Brexit almost certainly eliminates the possibility of a July rate hike by the Federal Reserve. And Fed policymakers have indicated they are observing the situation and are prepared to ensure a liquidity crisis does not develop. Additionally, due to a flight to quality effect, the yield of the 10-year Treasury Note has fallen below 1.5%. Declines in the 10-year yield in turn imply lower rates for mortgages.
With respect to currency markets, the value of the dollar has increased. This reduces the relative price of imported building materials, although it does reduce home buying demand among international buyers.
Second, the economic effects due to Brexit are likely to be minor. The uncertainty exhibited in financial markets will have an impact on job creation and business investment in the coming month or two as balance sheets adjust to price movements. However, U.S. real estate markets are unlikely to be affected in a major way by changes produced by the Brexit decision. The actual divorce of the U.K. and the E.U. will play out over two years or more. And it remains a possibility that those separation proceedings will continue to enable free trade between the U.K. and Europe, as well as ongoing rules concerning cross-national workers. However, the U.K. Treasury forecasted significant domestic GDP declines due to Brexit over the next 15 years, and while those estimates may be biased to the high side, spill-over effects to the U.S. are possible.
The construction industry in the U.K. will see real estate price declines, which could actually help raise first-time buyer market participation. Over the medium-term, construction firms in the U.K. will also see worsening access to labor. With respect to the short-run, there will be large impacts on U.K. homebuying as consumer uncertainty takes hold.
Lastly, the political impacts will be the most long-lasting and perhaps produce more significant economic impacts. Brexit could encourage other Western European countries to consider a variety of political exits. For the Dutch, this may mean their own Brexit-style decision. For Scotland and Northern Ireland, there could be a renewed effort to separate from the U.K., with Scotland seeking a place among E.U. nations. Such efforts, to the extent that they would produce reduced free trade and diminished mobility among workers, would worsen a continent already suffering from low growth and relatively high joblessness. These factors would in turn reduce U.S. growth due to exports, requiring a reduction in medium-term and long-term economic projections. But those effects remain hypothetical at the moment.