As negotiations between the U.K. and the European Union on the terms of their separation are underway, the reality of Brexit pushes companies to begin shifting some jobs to the EU. This outmigration already has started to affect the London property market, where rents have fallen. But judging by what analysts at Societe Generale predict, a full-blown crash in London property prices should not be ruled out.
In a recent research report focusing on U.K. real estate, the analysts warned that "Brexodus" -- the departure of some workers because of the Brexit vote and companies relocating jobs -- already has started, even before the final shape of a deal with the EU is known.
In London, workers from the EU make up 17% of the total employment base compared with 7% on average in the U.K., according to Societe Generale's research. Net migration slowed by 24% from June to December last year, to 112,000. This is still far from the "tens of thousands" promised by Prime Minister Theresa May, but the reduction shows that the vote has made the U.K. less attractive for foreign workers, even without any changes in working conditions or legislation.
"Brexit has even barely begun and we can already list more than 24,000 jobs set to relocate outside the U.K.," the analysts said in their report, which contains a list of banks and other companies that have announced job shifts to the EU.
Consultancies EY and Oliver Wyman have estimated that if firms in the City of London lose their financial "passport," which gives them the right to sell their services in the EU, it will cause the loss of 50,000 to 85,000 jobs.
London house prices had benefited from multiple tailwinds, from low interest rates and good availability of credit to incentives for buy-to-let buyers and strong immigration. Brexit comes at a time when many of these tailwinds were turning into headwinds anyway. Interest rates hardly can go any lower and the government has tried to ease the burden of first-time buyers a little by imposing additional stamp duty on buyers of second homes and phasing out tax relief for landlords.
U.K. real estate has been in a bubble since December 2014, because prices have climbed two standard deviations above their long-term trend, according to a methodology developed by global investment management firm GMO to spot property bubbles.
According to the same methodology, global residential cycles have an 80% probability of bursting after spending 30 to 36 months in bubble land. With 33 months already in a bubble, U.K. residential property is bang in the middle of dangerous territory.
The Societe Generale analysts' research looked at the number of firms that announced relocations so far and assumed that 10,000 managers were to leave the U.K. If only one-third of those households are "forced sellers," it would bring to the market more than one year's worth of transactions for property exceeding £2.0 million in value.
London house prices look very expensive, at 12 times the average London wage compared with the long-term average of six times. "Given the current ratio of prices to incomes in London, a price correction of up to 50% in the most expensive London boroughs does not seem impossible," the analysts wrote.
Some estate agents said the pound's weakness, coupled with the fall in real estate prices, has intensified interest from foreign investors outside the EU, especially the Chinese. One London property consultant, writing in the South China Morning Post, said interest from Chinese buyers increased by 60% in the year to April 2017.
But it is by no means certain these heightened inquiries will result in acquisitions. Ironically, if before last year's Brexit vote the EU looked like a disintegrating entity that Britain would be wise to leave, now the roles seem reversed: political crises have subsided (for now) in the EU, whereas the U.K. looks unstable -- a position of weakness to which it is not accustomed.
Therefore, eurozone property might look like more of a safe haven to foreign investors than U.K. property right now. Still, the peaking of the London bubble eventually might tempt some people in, though investors looking to take advantage of cheap London property might need to wait a while. The last time there was a bubble, it lasted for 48 months before prices finally gave way in 2007.