The suspension of trading in some major property funds has been treated by the media as a negative effect of the intended Brexit (Brexit does not happen for at least 2 years). The reason for the panic is undoubtedly that investors were afraid that the UK would implement controls on the movement of capital after leaving the EU in 2018. (At present the "Single Market" allows the free flow of capital between the UK and the EU). Once such an idea gets hold those that "sell out" cause price falls that lead to everyone else selling out before the price hits bottom.
Superficially this all sounds terrible: "stupid Brits cause collapse in commercial property by Brexit". The truth is very different. The UK has become a major recipient of investment because of the Euro crisis. Investors can invest here and enjoy "Single Market" movement of profits, rents and capital back to the Eurozone. As a result the UK has an enormous Primary Income Deficit. our economy is haemorrhaging cash at an alarming rate to the EU.
Notice that it is the primary income balance, the rents, dividends, profits, wages etc. remitted abroad that is the worst deficit item.
Most of the current account deficit finds its way to the Eurozone:
Just look at the scale of the transfers to the EU, they are over £100 billion a year!
This is wonderful if you are a Eurozone investor or a "Floater", someone who can move freely around the EU. However, if you are an ordinary UK citizen, a person who wants to stay with friends and family and not move to Berlin or Madrid along with the rents and profits, it is not such a happy state of affairs. The continuous extraction of Primary Income is converting the UK economy into a source of revenue for the Eurozone that is not re-invested back in the UK. The rents, profits etc. stay in the Eurozone, increasing its wealth.
The deficit is not like a generalised "Balance of Payments Deficit", it is highly specific, focussed on one trading partner and largely due to EU rules that allow free movement of capital. It is plundering the UK economy.
Brexit will stop this plundering from happening. Fortunately the panicking foreign investors are doing the job for us by selling their investments when the pound is low. Obviously the loss of the illusory economic volume associated with the Primary Income Deficit will appear at some time as an apparent decrease in GDP but this is a good decrease because that part of UK GDP benefits the Eurozone and not the UK.
Controlling the Primary Income Deficit is an important reason for leaving the EU. We do not want the UK to be a "hick" province sending off rents and profits to Eurozone companies in Paris or Berlin, becoming ever poorer as its wealth drains away.
The greater than £100bn pa Current Account Deficit with the EU would never have been permitted with any other trading partner. It could not be stopped because of the "Single Market" so was, in itself, a reason for leaving the EU. Were the UK to Remain in the Single Market the deficit with the Eurozone suggests that the UK would become to the EU as Scotland was to England in Victorian times. It would be a region controlled by absentee landlords and Eurozone companies.
There are down sides to this adjustment. Banks and other institutions hold commercial property as an asset. The Bank of England and government will need to deal with the transient excessive fall in property values by backing banks until there is a reasonable recovery of value in commercial property. The Bank of England saw this coming so should have measures in hand. The Bank of England and Government should also be aware that there could be runs on all sectors that cause the Primary Income Deficit with the EU. These will have a temporary effect and it is worth overcoming this period of strain to preserve our country's economy in the long run.
It is becoming evident that the Government and Bank of England are like naughty little boys who have been covering up a serious mistake. Their economic argument for remaining in the EU was really just a vain hope that no-one would catch them out for allowing Eurozone-UK economic relations to deteriorate so badly. Had we stayed in the EU the steady drain of the nation's wealth might not even have been noticed, people would just have been puzzled that no matter how much GDP was growing or foreign investment was increasing they were getting no richer.
Afterthought
The Commercial Real Estate (CRE) market started experiencing difficulties in 2015. It looks like the much needed adjustment was in the pipeline already and cannot be blamed on Brexit - Brexit just gave it an extra push:
The driving force behind the fall is, of course, commercial property prices:
Overall the fall in commercial property is good for businesses because it lowers overheads, good for the people of Britain because it will lower the Primary Income Deficit but worrying for the banks. As we all know, the US Investment Banks were the key players in financing the "Stronger In Europe" campaign....
See also:
6 U.K. property funds are frozen: What you need to know
For a deeply depressing but accurate insight see:
Brexit Blowback - The Panic Will Start With Property
Superficially this all sounds terrible: "stupid Brits cause collapse in commercial property by Brexit". The truth is very different. The UK has become a major recipient of investment because of the Euro crisis. Investors can invest here and enjoy "Single Market" movement of profits, rents and capital back to the Eurozone. As a result the UK has an enormous Primary Income Deficit. our economy is haemorrhaging cash at an alarming rate to the EU.
 |
| Data ONS |
Notice that it is the primary income balance, the rents, dividends, profits, wages etc. remitted abroad that is the worst deficit item.
Most of the current account deficit finds its way to the Eurozone:
This is wonderful if you are a Eurozone investor or a "Floater", someone who can move freely around the EU. However, if you are an ordinary UK citizen, a person who wants to stay with friends and family and not move to Berlin or Madrid along with the rents and profits, it is not such a happy state of affairs. The continuous extraction of Primary Income is converting the UK economy into a source of revenue for the Eurozone that is not re-invested back in the UK. The rents, profits etc. stay in the Eurozone, increasing its wealth.
The deficit is not like a generalised "Balance of Payments Deficit", it is highly specific, focussed on one trading partner and largely due to EU rules that allow free movement of capital. It is plundering the UK economy.
Brexit will stop this plundering from happening. Fortunately the panicking foreign investors are doing the job for us by selling their investments when the pound is low. Obviously the loss of the illusory economic volume associated with the Primary Income Deficit will appear at some time as an apparent decrease in GDP but this is a good decrease because that part of UK GDP benefits the Eurozone and not the UK.
Controlling the Primary Income Deficit is an important reason for leaving the EU. We do not want the UK to be a "hick" province sending off rents and profits to Eurozone companies in Paris or Berlin, becoming ever poorer as its wealth drains away.
The greater than £100bn pa Current Account Deficit with the EU would never have been permitted with any other trading partner. It could not be stopped because of the "Single Market" so was, in itself, a reason for leaving the EU. Were the UK to Remain in the Single Market the deficit with the Eurozone suggests that the UK would become to the EU as Scotland was to England in Victorian times. It would be a region controlled by absentee landlords and Eurozone companies.
There are down sides to this adjustment. Banks and other institutions hold commercial property as an asset. The Bank of England and government will need to deal with the transient excessive fall in property values by backing banks until there is a reasonable recovery of value in commercial property. The Bank of England saw this coming so should have measures in hand. The Bank of England and Government should also be aware that there could be runs on all sectors that cause the Primary Income Deficit with the EU. These will have a temporary effect and it is worth overcoming this period of strain to preserve our country's economy in the long run.
It is becoming evident that the Government and Bank of England are like naughty little boys who have been covering up a serious mistake. Their economic argument for remaining in the EU was really just a vain hope that no-one would catch them out for allowing Eurozone-UK economic relations to deteriorate so badly. Had we stayed in the EU the steady drain of the nation's wealth might not even have been noticed, people would just have been puzzled that no matter how much GDP was growing or foreign investment was increasing they were getting no richer.
Afterthought
The Commercial Real Estate (CRE) market started experiencing difficulties in 2015. It looks like the much needed adjustment was in the pipeline already and cannot be blamed on Brexit - Brexit just gave it an extra push:
 |
| Commercial Property Price Index |
See also:
6 U.K. property funds are frozen: What you need to know
For a deeply depressing but accurate insight see:
Brexit Blowback - The Panic Will Start With Property
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