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Brexit Could Be the Last Straw for London’s Crazy House Prices

Real estate in 'Gateway Cities' like London has been a favorite asset class for the last few years, but even that is struggling to generate returns now.Loop Images UIG via Getty Images

It was—as it so often is—the satirical magazine Private Eye that captured the moment best.

Prime Minister David Cameron’s campaign to scare British voters into remaining in the European Union with a series of apocalyptic forecasts about the economic folly of leaving it had intensified in pitch all through the spring. It seemed the hype could go no further when Cameron predicted in early May that breaking up the E.U. could trigger a new war. But as even that failed to put clear blue water between the Remain and Leave camps, Treasury chief George Osborne resorted to the only kind of threat that Middle England responds to. He suggested that house prices could fall by up to 18% in the event of a Brexit, a financial disaster for the many British who tie up the larger part of their wealth in their properties. The publication deemed that foreboding the moment Cameron’s campaign—”Project Fear”— went nuclear.

We’ll leave such speculation until after the vote count, but one thing is clear: if Britain does decide to leave on Thursday, it will be the London real estate market that suffers most.

To a degree, that’s because it has further to fall: prices are already inflated to a degree beyond the comprehension of anyone outside of Manhattan or San Francisco. The average asking price for a central London property was 832,733 pounds ($1.22 million) in June, over 25 times average Londoners’ earnings. Overall prices in the city have risen 55% since 2010, whereas those in the rest of the country have risen only 24%. That means affordability is already “stretched,” according to a classic English understatement from Miles Shipside, a market analyst with real estate website Rightmove.

The second big reason why London will be hit hardest is because Brexit will almost certainly mean an end to the incoming stream of bankers and other financial services professionals from the U.S., Europe, and the rest of the world, many of them backed by generous company-sponsored housing allowances. London is the E.U.’s financial capital, but many banks are threatening to relocate at least part of their operations if the City of London loses its privileged access to the E.U.’s single market.

Already, prices in exclusive boroughs such as Kensington and Chelsea and Richmond-upon-Thames have seen prices fall 9.4% and 10.2% year-on-year, respectively, according to Rightmove. The trend may have much further to run: PriceWaterhouseCoopers reckons Brexit could put 100,000 financial services jobs at risk by 2020. That 2-bedroom apartment next to Canary Wharf might consequently struggle to find buyers at 1.57 million pounds.

While predictions about the long-term effect on the economy are still subject to too many variables, one thing everyone agrees on is that the uncertainty will put a chill on most big spending.

“[It] will come down to confidence…which…is largely dictated by the media,” according to Russell Quirk, CEO of online realtor eMoov. “A few sinister headlines and people will sit tight and do nothing. This lack of investment and activity in the property market will prompt a fall in buyer demand, and then we are in a Catch-22 situation whereby it becomes a self-fulfilling prophecy.”

The mistake that many have made in recent years is to underestimate the sheer scale of foreign demand: foreign investors have spent over $150 billion on London real estate since 2008, according to some estimates. But there are signs that the relentless rise in London values could be running out of steam, regardless of the Brexit vote.

The same George Osborne who warned about falling prices is, in fact, trying pretty hard to bring them down as gently as he can, now that even his party’s core voters (and their children) are struggling with affordability. In March, Osborne replaced the flat “stamp duty” on property purchases with a progressive one that punishes higher-value properties more. He also introduced new levies for purchases through offshore companies (a move that could hit everybody from corrupt oligarchs and officials in China and the former Soviet Union to UN women’s ambassador Emma Watson) and abolished tax privileges for mortgages on rental properties.

Nor is Osborne the only politician with designs on deflating the London market. Newly-elected Mayor Sadiq Khan is threatening action against foreign investors who leave their London homes empty as “gold bricks for investment”—although he hasn’t shown his hand yet.

It’s easy to see how a vote for Brexit could make it harder for Khan to rebalance the market in favor of locals. If the pound falls—as many in financial markets including veteran speculator George Soros predict—then that will make London properties cheaper for foreign investors, who often buy with cash (at least until economic fundamentals reassert themselves in the currency markets). At the same time, higher economic uncertainty at home should logically mean higher risk premiums on home loans for local buyers, squeezing them even further.

That may be an odd prediction to make a day after HSBC cut its two-year fixed mortgage rate below 1% for the first time ever. But in the terra incognita of a post-Brexit world, the only honest thing to say is that anything could happen. Even nothing much at all. At least we don’t have much longer to find out whose scare stories will be tested in real-world conditions.