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Economic Myths: Falling GBP will push up UK house prices

Sunday, October 23, 2016 4:10
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From The Independent:

Estate agents in the UK have been swamped with calls from Chinese, Middle Eastern, Italian and Spanish buyers looking for a bargain after the pound tumbled to more than 30-year lows, making the exchange rate very favourable for foreign buyers.

With global commodities like oil, if GBP falls and world price of oil stays the same, then the GBP price of oil goes up, obviously.

Not so with land and buildings. Land and buildings sell for a multiple of the rental income and the rental income is in GBP. So if GBP falls, the rent falls in foreign currency terms and so the price which a foreigner is prepared to pay also falls in his own currency terms, and by definition is unchanged in GBP terms. The two effects neatly cancel out.

So in practice, GBP levels against other currencies have no little no effect on the selling price of UK land and buildings (in GBP terms). This is easily observable, or more to the point, is not observable at all because the effect does not exist, or the effect is so faint it is masked by 1,0001 other factors.

I can see the obvious counter-objections to this and I might as well deal with them.

1. “Ah, but wealthy foreigners aren’t snapping up London homes for rental income, they are buying them to show off to other rich people.”

Quite true, but when wealthy foreigners are bidding, the baseline is that they have to outbid the locals i.e. people who earn GBP and will be paying in GBP.

Further, it is a similar set of factors which influence GBP levels as influence the price of land and buildings, the two seem to move in tandem rather than in opposite directions (interest rates being one exception, a cut pushing GBP down but pushes the price of land and buildings up).

2. “Foreigners will gamble on GBP bouncing back.”

Sure, but everybody can do that and there are simpler ways of speculating on currencies than buying land and buildings, with far lower transaction costs. And at any one time, we have to assume that whatever the FX rate (or any other random financial market variable) is, half of people expect it to fall and half expect it to rise.


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