There is one sector of the U.K. economy that is set to suffer the consequences of the Brexit vote that almost nobody really talks about: buy-to-let property. This type of investment had been doing extremely well before the vote, with landlords using the leverage of historically cheap debt to increase the number of properties in their portfolio.
Combined with strong foreign investment and growing demand for housing amid rigid supply, the buy-to-let sector has contributed to a rapid increase in house prices, especially in London and the south-east of England. In turn, this has brought even more investors into the buy-to-let property sector, to the point where last year the Bank of England warned that it may pose a danger to financial stability.
Unlike mortgages for homeowners, those extended to landlords are interest-only. The landlord can usually pay only the interest on loan, with many of them relying on higher property prices down the line to repay the principal. There are newspaper reports of ordinary families who have built portfolios containing multiple properties bought like this.
Leverage amplifies not just the gains, but also the losses for the investor who uses too much of it. There is a danger that the Brexit vote will, in the famous words of Warren Buffett, expose those who've been swimming naked.
Prime Minister Theresa May's stance on finding a way out of the European Union relies on the premise that the British people want to reduce immigration more than they want to maintain the free trade advantages of being in the single European market. A survey quoted on Tuesday by Bloomberg confirms that her view is correct: 58% of the respondents approved of her handling of negotiations versus just one-quarter who disapproved.
This stance, however, could contribute to already increasing headwinds threatening the property sector. Fewer immigrants translate into fewer clients for the buy-to-let sector. Tenants will no doubt feel relieved that seemingly never-ending rent rises come to an end. However, some landlords might find they do not make enough to cover the costs of the mortgages on their buy-to-let investments.
The signs of trouble were already there: The Bank of England's credit conditions survey for the third quarter shows that demand for house purchase lending fell "significantly" in the period. Within this, demand for buy-to-let lending posted the largest fall since the survey began in 2007.
This falloff partly could be because demand was brought forward in the spring, just before a change in the tax regime that came into force in April. Lenders responding to the survey expect demand to pick up in the fourth quarter. I doubt it will, though, or if it does it will be for a brief period.
Besides a decline in immigration cutting the numbers of future tenants, the number of existing ones may fall as well. There already are reports that banks are making plans to move jobs abroad to various cities in the EU because of the need to maintain "passporting" rights -- the right to provide services in all other 27 members of the bloc -- after the U.K. leaves.
Each bank is unlikely to move huge numbers of employees, but taken together the relocations could make a big difference to the numbers of highly paid employees in London. A precise number is hard to pin down, but some reports spoke of around 70,000 job losses in the financial center, also known as the City.
To these, add other jobs that are connected in services as diverse as pubs and restaurants, but also perhaps among hairdressers, beauty salons, cleaning and catering, to name a few. We will not see tumbleweed rolling on the streets of residential London districts, of course, but rental vacancies are very likely to increase.
Another factor to bear in mind is that government revenues are set to shrink because of Brexit. Fewer jobs mean fewer payroll taxes, and instead the state may see itself needing to pay unemployment support to those made redundant by relocation, unless they choose to move as well.
Such an outcome could diminish the resources available for various handouts that have been propping up the housing market. The government may reduce again the amount of housing benefits it is willing to pay to support rents and could be forced to trim the various subsidies it has had in place for house buyers.
The fall in the pound -- it has lost 18% to the dollar since the referendum and around 14% to the euro -- could drive away migrant workers in lower-paid jobs. The weaker currency might make it more profitable for them to try to find jobs in the eurozone rather than in the U.K. They would vacate rental properties as well.
Some of the tax relief for interest paid on mortgages by landlords is set to start to be phased out from April next year, and a glut of properties are coming to the market soon due to a mini-boom in a construction area that was seen as lucrative.
Taking into account all these headwinds, U.K. buy-to-let property seems best avoided. Particular stocks to be careful about are Lloyds Bank (LYG) , the country's biggest lender, as well as challenger banks Metro Bank (MBNKF) , Aldermore (which is only listed in London under the symbol ALD), Shawbrook (another London-only listing, symbol SHAW) and Paragon (symbol PAG on the London Stock Exchange).