Expert Commentary

Deflation Haunts Brexit’s Day of the Dead

As the saga of Brexit goes on, U.K. property prices continue to fall.

Normally dour European Union (E.U.) officials displayed a rare sense of humor after their working dinner late on the night of 10 April by allowing the United Kingdom of Great Britain and Northern Ireland (U.K.) to delay "Brexit" until Halloween, a celebration observed on 31 October, the eve of the Western Christian feast of All Hallows' Day, the time in the liturgical year dedicated to remembering the dead and all the faithful departed. Oh how they must have chuckled about how appropriate that is over their postprandial nightcaps in Brussels.

However, Brexit might not even happen on that day. The U.K. can leave the E.U. earlier if it so decides, or it cannot leave at all if the growing call for another referendum is successful. So the rancor will continue in the U.K. and business people across Europe will go on tearing their hair out at the seemingly perennial uncertainty. That uncertainty is already showing up in the property market.

EWI has been highlighting declining high-end property prices in London from 2018 and the latest survey from the Royal Institution of Chartered Surveyors (RICS) evidences a broadening negative mood in the property sector. The chief economist at RICS states, "Brexit remains a major drag on activity in the market, with anecdotal evidence pointing to potential buyers being reluctant to commit in the face of the heightened sense of uncertainty."

The RICS Residential Market Survey is a monthly sentiment survey of Chartered Surveyors who operate in the residential sales and lettings markets. It is calculated on a net balance methodology. meaning the proportion of respondents reporting a rise in prices minus those reporting a fall. It is therefore a measure of the breadth of price movement, rather than the depth.

The chart shows that the index has been declining and in negative territory since August 2018, meaning that more and more parts of the country are reporting price declines. The negative mood is nowhere near the historic extremes reached in the early 1990s and in 2008 (when, interestingly, the lowest reading was reached in April 2008 -- months before the zenith of the financial crisis.) Notice too that, since the start of the data in the 1970s, the trend has been for the index to sport lower highs and lower lows. That could be seen as a glacial, generational weakening of the British cultural trait of viewing property as an investment. Or it could be an indicator of a gradual slowing in the underlying U.K. economy over the decades of a still-ongoing Supercycle top. From a linear trend identification basis alone (something we treat with caution to be fair,) it suggests that further weakness is possible. Given our Elliott wave outlook of a negative social mood trend and deflation in Britain, it is probable.

190417 MG Deflation