by Tom Bill
Linking a property purchase to the performance of currency markets is a particularly high-risk strategy in 2017
The pound has weakened markedly against the dollar since the EU referendum last June, which means large double-digit discounts are available for buyers of London property not denominated in sterling.
A US buyer moving to prime central London would have benefited from an effective discount of 22% since the referendum given currency and house price movements.
The discount was similar for an Indian, Hong Kong and Middle Eastern buyer, while the figure was 17% for a Chinese buyer and 28% for a Russian.
However, many potential buyers are waiting for the perceived ‘bottom’ of the exchange rate before acting.
This is a high-risk strategy for two reasons. First, currency markets are naturally volatile given the huge trading volumes (and numbers of traders) compared to other markets. Second, geopolitical uncertainty will remain high in 2017.
Some of those waiting for the bottom will have been watching markets closely today given that Article 50 was formally triggered by the UK government.
By lunchtime on Wednesday, sterling was trading at US $1.24.
This underlines the risk associated with linking a property purchase to the vagaries of the Forex market.
Sterling was at its weakest against the dollar since the Brexit vote on 16 January 2017, ending the day at $1.21, the equivalent of a -17.75% decline since the referendum. If a buyer wanted to play the currency market successfully before buying a property, that was a better date to act.
What happens next during Brexit negotiations and on the currency market is, of course, unknown. We know the pound is likely to remain relatively weak versus the dollar this year against the background of rate rises in the US. However, some anticipate a weaker dollar as part of a drive to stimulate US trade.
It is the sort of conflicting scenario that underlines how difficult waiting for the bottom will be. If you ask six different investment banks for their year-end forecast for the pound, you are likely to get six quite different responses at the moment.
The pound will react to the trajectory of Brexit talks, but this will be based on interim updates from politicians and anonymous press briefings surrounding a particularly complex set of negotiations whose outcome won’t be known for at least two years. Remember the mantra in Brussels is “nothing is agreed until everything is agreed”. And if pragmatism takes a firmer hold, as many expect, the pound will rise.
Given all of this, most buyers offered a 22% discount this time last year would probably have taken it.
There are echoes of the unfulfilled expectations surrounding the property market itself following the Brexit vote. There was a belief that large discounts would be available on the morning of 24 June. They weren’t. Instead there are signs that pricing is bottoming out as the market adapts to a new fiscal landscape.
These are exactly the sort of conditions where the smart money will be taking a long, hard look at market.
