You’d have to be living under a rock not to have heard about the fallout of Brexit.
The decision by Britain to leave the European Union has sparked shock, disbelief and fear.
One big question on everyone’s mind is how does this affect the rest of the world?
Others want to know what is Brexit, what is the EU and how will this affect Australia and in particular our property markets.
To help you better understand what’s going on, let’s do a Q & A:
What is the EU?
The European Union is an economic and political union between 28 European countries that was created in the aftermath of the Second World War.
The first steps were to foster economic cooperation: the idea being that countries that trade with one another become economically interdependent and so more likely to avoid conflict.
The European Economic Community (EEC) was initially created in 1958 with increasing economic cooperation between six countries: Belgium, Germany, France, Italy, Luxembourg and the Netherlands.
This laid the foundations of today’s European Union with 28 member states with a total population of more than 500 million.
When did the UK join the EU?
The UK was not a signatory to the Treaty of Rome which created the EEC in 1957.
It subsequently applied to join the organization in 1963 and again in 1967, but both applications were vetoed by the then President of France, Charles de Gaulle.
Once de Gaulle had relinquished the French presidency, the UK made a third application for membership, which was successful and on 1 January 1973 the United Kingdom joined the EEC, then often referred to in the UK as the “Common Market”.
Has the UK tried to leave the EU before?
Yes – on 5 June 1975, the UK electorate asked to vote yes or no on the question:
“Do you think the UK should stay in the European Community (Common Market)?”
Every administrative county in the UK had a majority of “Yes”, except the Shetland Islands and the Outer Hebrides.
In line with the outcome of the vote, the United Kingdom remained a member of the EEC.
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What just happened?
In 2012, Prime Minister David Cameron rejected calls for a referendum on the UK’s EU membership, but suggested the possibility of a future referendum to gauge public support.
Then in a speech to the House of Commons on 22 February 2016, Cameron announced a referendum date of 23 June 2016 and set out the legal framework for withdrawal from the European Union in circumstances where there was a referendum majority vote to leave.
The Brexit (British exit) vote was unexpected, and since it is only ‘advisory’, in other words it offers no guidelines to parliament about how Britain should exit the EU, basically no one really knows what’s ahead and what it all means.
What was the result of the 2016 Referendum?
The Brexit vote was hardly resounding – especially for something as important as this.
The result from the vote was that the United Kingdom had voted to leave the European Union 52% to 48%.
While England and Wales voted to “Leave” with 53.4% and 52.5% respectively, Scotland and Northern Ireland were both firmly in “Remain” territory.
Scotland, which previously held its own independence referendum in 2014, voted overwhelmingly to have the UK remain in the EU with a 62% vote.
Northern Ireland had a similar sentiment with 55.8% voting “Remain”.
Scotland’s First Minister, Nicola Sturgeon, feels Scotland was taken out of the EU against its own will, and that Scottish independence is worth revisiting.
However, it is not just people on the fringe that are interested in revisiting EU membership.
Even before the Brexit result, a poll by Ipsos Mori showed that the majority of people in France and Italy want to at least have a referendum on leaving and over 40% of Swedes, Poles, and Belgians are in the same boat.
What happens now?
Well, technically Britain has not filed for divorce yet – it’s just told the EU that it’s thinking of leaving.
To leave the EU, the UK first needs to formally invoke Article 50 of what is known as the Lisbon Treaty.
Article 50 has never been used, because no country has ever left the EU before.
When it is invoked in a letter or a speech, two years or possibly longer of negotiations begin.
After the vote to leave was confirmed David Cameron did not immediately invoke Article 50 of the Lisbon Treaty, which is necessary in order to begin the formal process of withdrawal.
Instead, he announced that he would resign as Prime Minister prior to the Conservative party conference in October 2016 and stated the following:
“A negotiation with the European Union will need to begin under a new Prime Minister, and I think it is right that this new Prime Minister takes the decision about when to trigger Article 50 and start the formal and legal process of leaving the EU.”
Since the result’s announcement, a petition, calling for a second referendum to be held in the event that a result was secured with less than 60% of the vote and on a turnout of less than 75%, attracted millions of new signatures.
At the same time Scotland is again considering breaking away from England and staying part of the EU.
There is now an increased risk of a UK recession and if the EU breaks up there is an increased chance of a European recession which is also still grappling with financial woes and a migration crisis.
Some European politicians are now calling for change to avoid a Frexit, (French exit) or a Daxit (Danish exit) or maybe even a Duxit (Dutch exit.)
At the same time the British currency has devalued and Britain has been stripped its AAA rating rating with both Standards and Poors and Fitch Ratings
Effects on Australia and our property markets
The uncertainty surrounding the future for Britain and its future relationship with the EU, which looks likely to remain for months if not years, has clearly frightened the world’s share markets which are already volatile and jittery.
No one really knows how long it will take to work out precisely what a post-EU Britain will look like, or what will happen to a post-Britain EU.
Uncertainty surrounding the future of trade agreements would presumably take a significant amount of time to work through.
And uncertainty is bad for business and the financial markets hate uncertainty.
Not surprisingly this uncertainty has led to much speculation.
People are asking “will Europe fall into recession?”
They’re wondering of Australian interest arrest will rise if funding costs go up in Europe as our banks are exposed to European financial markets.
Others see our interest rate dropping as the world’s economic markets slow down.
And since no one really knows what’s ahead the financial markets are all over the shop.
The direct impact of Brexit on Australia is likely to be fairly limited, partly because of our reliance on our Asian trading partners.
We are, however, exposed through our services trade -tourism and financial services.
The bigger threat may be from weaker commodity demand and lower commodity prices that could drag on Australian incomes.
With regards to property, London was a preferred destination for many foreign (particularly Asian) property buyers, who may now potentially turn their attention to Australia.
With the level of uncertainty now in Europe and Britain, Australia will look even more attractive for these foreign property buyers.
We will be increasingly seen as a safe, politically and economically stable environment particularly compared to the volatile European environment.
So what should Australian property investors do?
My advice is to stick to your original strategy- you do have one, don’t you?
This will mean that you won’t get distracted by all the market noise.
Think big picture and long term and remember that Australia’s population growth and our relatively strong economy will ensure that well located “investment grade” properties will keep increasing in value over the long term.
If you’re looking for independent advice, no one can help you quite like the independent property investment strategists at Metropole.
Remember the multi award winning team of property investment strategists at Metropole have no properties to sell, so their advice is unbiased.
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