08 Nov THE UK Property Market – What If Trump Wins?
The 2016 battle for the White House has been one of the most acrimonious and bitterly fought presidential election campaigns in living memory
- Both Donald J Trump (“Trump”) and Hillary Rodham Clinton (“Clinton”) are by some margin the least popular candidates in the history of Presidential election campaigning
- Until only a few weeks ago it seemed a foregone conclusion that Clinton would be victorious, however a renewed FBI investigation into her private email server has swung momentum back in Trump’s favour
- There is considerable confusion as to the actual powers that the US President actually possesses
- Although the US President wields great power militarily, legislatively his powers are more limited
- Both US bond yields and stocks have plunged, as the markets started to react to the possibility of Mr Trump victory in the last several days. It is a potentially worrying scenario for the global economy, but the UK property market could be a net winner
- We conclude that a Trump win would not be the disaster that many predict although the short term uncertainty could be troubling.
- We also are a little concerned by the isolationist rhetoric of Mr Trump and hope that the US will not seek to close off its markets to a Brexiting UK
With much of the world approaching Tuesday’s election with baited breath, following one of the most bitterly fought Presidential election campaigns in living history we have chosen to analyse what only a few weeks ago might have seemed to be unthinkable, namely a Trump victory securing the White House from January 2017.
Both Trump and Clinton are by a distance the least popular Presidential candidates with USA Today finding Trump with a massive 63% “unfavourable” rating. Clinton did not fare much better, on a 56% “unfavourable” rating. Clinton seemed destined to be the first female President until around a fortnight ago, when the FBI, as part of the Anthony Weiner investigation, uncovered new evidence that was sufficient to reopen their investigation into Clinton’s use of a private email server when acting as Secretary of State (as of yesterday the FBI have confirmed their subsequent investigations yielded the same conclusions they came to in July and are taking no further action). The timing of this revelation was significant being so close to the date of the vote and deflected attention away from Trump who was reeling from multiple scandal of his own. Trump has since gained momentum in polling and many forecasters believe that the outcome is within the margin of error and thus too close to call. However, Trump’s path to the White House, namely the 270 electoral college votes he needs to be President, has always been more challenging than Clinton’s and the statistical probability of a Trump win is less than 25% according to Betfair. Such binary predictions are not necessarily right (Brexit had a similar probability the day before polling) but just reflect the weight of money placed in each direction.
What Can The President Actually Do?
There is some confusion about what power the President actually has. People outside the US seem to have the impression that the US President can waive through whatever legislation they wish and do whatever they wish. This however is not the case. The US has a substantial legislature (Congress) in both the House of Representatives (lower house) and the Senate (the upper house) both of which have significant legislative powers.
POTUS can arrange to put forward legislation of his/her own design but there is no certainty that such legislation will be passed. All 435 seats in the House of Representatives and 35 seats in the Senate are also due to go to the ballot box this week. Whichever of the two main political parties is able to control either of the “Houses” could be very significant to how the US operates in the next 2-4 years. Should the House of Representatives be dominated by Democrats yet Trump be victorious in his race for the White House, then Trump would almost certainly struggle for his marquee legislation to be passed without material amendment or horse-trading.
Furthermore, even if Republicans dominate one or both “Houses” in conjunction with a Trump win, it is far from certain that Trump can be assured of an easy ride either. Trump is widely reviled by most leading Republicans, with some even stating publicly they would vote for Clinton (who in many ways is far more aligned with Republicans than those in her own party). Many of his policies are quite left-leaning and protectionist in their nature, which would offend Republican fiscal conservatives. The huge cost of the “wall” Trump wishes to build along the US-Mexico border would also fail to generate enormous enthusiasm (and no, Mexico is not going to pay for it). Trump is also not a social conservative, which would rub up against House Republicans from the religious right. As anyone who watches Netflix’s “House of Cards” will tell you, the President rarely gets it all his own way.
However, the US President is not a ceremonial head of state. He/She will still have considerable powers, which we summarise below (credit to https://www.quora.com/How-much-power-does-the-President-of-United-States-really-have which we have quoted/summarised in the bullets below):
- As long as he/she operates within the confines of the law, they can direct any executive agency to do anything they desire. Note abuse of power can result in impeachment and Congress has the power to remove a President if required.
- The President is “Commander in Chief” of military and can direct it as he sees fit. As Commander in Chief of the military, he is effectively the absolute authority on military policy. From an international point of view, this influence is very significant
- The President appoints numerous powerful positions like the cabinet secretaries (like State & Defense), ambassadors and directors of semi-autonomous agencies (like the CIA, NSA and FBI).
- The President also appoints the chairman of the Federal Reserve bank (who can be dismissed by the president and who, effectively holds the most powerful economic position in the world).
- Significantly, he/she nominates judges to the various courts and justices to the Supreme Court, the ramifications of which are not to be underestimated since the Supreme Court holds the power to decide and interpret all laws within the USA. Note: all of these appointments must be confirmed by the Senate.
- The President is the de facto leader of the free world. As much as other countries hate this fact, inevitably they turn to the US for permission and guidance when engaging in any number of activities, particularly militarily.
- The President has the ability to veto any bill that Congress sends to him. Unless they have 2/3 votes within both houses (which they rarely do).
Thus, whilst Trump may have his legislation blocked by Congress, he would have the nuclear launch codes and the ability to make a military strike anywhere in the world and at any time of his choosing. That is something to be taken seriously. And whilst Congress could block any of Trump’s proposed legislation, he could conversely block most legislation in the opposite direction, leading to legislative deadlock. There would therefore need to be an inevitable element of compromise between Congress and a President Trump (if elected). Consequently, some of his campaign legislation could end up being passed, albeit watered-down to sufficient degree in order that it might pass into law.
So What Does That Mean for The UK Economy?
The medium picture for the UK economy remains unclear following the vote in June to leave the EU. To date, economic performance has been relatively robust with GDP growing by 0.5% in Q3 2016. Furthermore, the property market has remained reasonably strong, perhaps with the exception of London, which even prior to the vote could have been described as a “heavy market”. Many London submarkets have seen single digit annual percentage falls. Additionally, uncertainty around the terms of the EU negotiation to leave has stalled plans for many companies to expand investment in the UK. In fact, some financial firms are reported to already be looking to scale back their operations in London given the likely possibility that the UK will lose “passporting rights”. Thus, the fallout from this uncertainty may not be seen in the wider economy for 6-9 months despite reasonable GDP performance witnessed to date. This is contrasted with retail spending which has remained relatively strong.
US Markets have reacted poorly to when Trump’s polling numbers have been strong, as has been the case in recent weeks. There seems to be a view that a Trump win would be damaging for the global economy amongst the financial community (a view shared by many in Europe with over 50% of Europeans against a Trump Presidency according to recent polling).
Certainly Trump’s economic policies have a strong hint of protectionism around them, which is not necessarily good for the UK or the rest of the world. However, there is no certainty of such policies being put in place given that they would need to be passed by the US legislature, and this is far from guaranteed. In the absence of material change to legislation, little will change for US citizens and business will carry on as normal. In a digitized global economy, many protectionist measures may have limited effect in any event.
Still, a Brexiting UK will want to be negotiating a trade deal with a willing US partner, not one that wishes to close off its markets to the outside world, as Mr Trump’s rhetoric suggests. Although it is worth noting that Trump’s potential view of the UK may be more positive than the current administration, and he has said that the US would be the first to do a trade deal with the UK following Brexit.
It is worth noting that most commentators believe that the Federal Reserve will not raise interest rates in December if Trump wins. Predictions that are not without foundation, with such moves designed to rein in market fears about a Trump Presidency and give a feeling of “status-quo”. The US economy is still relatively fragile, but now growing fast enough for the Fed to consider raising rates for just the second time in almost a decade. Holding rates in December would ease market jitters but would lead to a weakened Dollar, as a Fed rate hike in December is believed to have been “priced-in” by many analysts. Thus, in the short term a Trump victory may result in a strengthened Pound, although by how much remains to be seen. A stronger Pound would naturally reduce the FX incentive for many buyers of UK/London property attracted by the weak Pound.
Perhaps one area that is also worth considering may be the defence sector, which is significant to the UK as BAE Systems (to name but one) is a big employer and exports considerable amounts of arms and equipment to the US military. Trump proposes a more non-interventionist military policy, which in theory would result in reduced military spending. However, his fabled “Muslim Ban” is likely to escalate tensions with the Muslim world and such non-interventionist policy may be short-lived as a result. Nevertheless, Trump has vowed to invest in the US military, providing it with what the New York Times claims to be $90bn of extra funding. Additionally, with Trump questioning the long term obligations of the US to defend its NATO allies, this may force the UK Government to invest again heavily in the military to guard against Russian muscle-flexing, which will therefore stimulate the defence-led manufacturing sector (funded by inevitable government borrowing increases).
What does this mean for the London & Wider UK Property Market?
A Trump victory could result in a large increase of American buyers in the UK and particularly London both residentially and commercially. Americans only make up around 2-3% of buyers in the Capital at present but that could change in future.
Attracted by Sterling at a record low against the Dollar, nonresident Americans may begin enthusiastically buying UK properties, much in the same way as their compatriots already living here, as reported by the Financial Times last week. This would add to a trend that was recently discussed at an ASTL lunch last week, with one Principal from an Avamore competitor stating that buyers from around the world view the UK as a fantastic buying opportunity, not least the Chinese who appear to be buying large commercial properties in the Capital very aggressively.
Additionally, recent rumors from Sotheby’s International suggest that many Americans will consider leaving the US if Mr Trump wins, with many looking at relocating to the UK. Note that similar predictions were made around a mass relocation to Canada in 2004 when George W Bush was re-elected that failed to come to pass. Nonetheless, Dollar-denominated commercial investors seem quite nervous about a potential win of the Republican candidate and the European property market, with the UK at the top of the list, will be always attractive from an investment perspective.
Regardless of the Presidential election outcome, any political change can destabilize the US domestic markets, which increases uncertainty and may cause a wait-and-see situation as appointments are made and policies are fleshed-out. As a consequence, active investors may seek alternative places to invest outside the US regardless of Tuesday’s winner, including the UK capital, provided that Sterling remains at its historically low levels. If Sterling rises back to above $1.30 in the event of a Trump win the appeal may be more muted due to Brexit uncertainties.
London Agent views on the impact of a Trump win are mixed. Stephanie MacMahon of Strutt & Parker states in this London Magazine Article: “a Trump win could discourage footloose investment into the US and, instead, drive greater interest and activity into London”. Converseley, in the same article, Andrew Langton, chairman of Aylesford International has different views. He states: “I don’t believe we will see migration from the US if Trump wins. We also have a tax system which is equally as unwelcoming,” says Langton. “I don’t believe either outcome will impact the property market.” It may therefore be necessary for the Chancellor to make some changes to the taxation of property (and on international buyers) to really take advantage of a Trump victory, at least as the UK property market is concerned.
The Avamore View
It seems incredible that despite being a country of more than 300 million people, the United States voting public has to choose between two candidates with the lowest popularity ratings on record. On the face of it, Clinton would marginally appear to be the better of two “options” given her vast experience as First Lady, in Congress and then as Secretary of State in the Obama administration.
If Trump were to be elected, this would not be the disaster many would lead you to believe. Whilst many of Trump’s proposed policies are controversial, the reality is that Trump is a showman and much like Nigel Farage has done in the UK he is using these skills to woo a disaffected white working class voter base that views him as the candidate for real change. However, it seems unrealistic that Trump would see many of the more controversial policies through to legislation because ultimately he is also a pragmatist at heart and has a history of altering his political views.
As detailed above, Trump’s legislative powers as President could be blunted by Congress and therefore it is hard to see many of his flagship policies such as “the Wall” and the “Muslim Ban” coming to fruition in full, if at all. Furthermore, despite his isolationist rhetoric, he knows he is not going to be able to magically make “rust belt” manufacturing jobs reappear by banning Chinese imports. The employment benefits of such moves would be limited in the era of robotics in manufacturing in any event.
Markets might initially react badly to a Trump victory, but much as they did with the Brexit result, they have since managed to climb to new peaks. Thus any “indigestion” the markets might have following a Trump win, would probably settle within 4-6 weeks, particularly when he begins to make senior appointments and provide detail around policy. Equally important will be the Congressional election results, which may determine quite how adversarial Congress and the “Executive” will or could be with each other.
What this means for the UK and London is unclear and any benefits will be indirect as nervous international investors revert to their “safe haven” location, namely London. This will be driven by fears of falls in more “opportunistic” locations.
A Trump win will likely soften the Dollar against the Pound and so in the short term this could reduce demand for UK/London property from buyers seeking to take advantage of attractive exchange rates. However, in the medium term this could also lead to a redirection of capital allocated to the US real estate market to the UK and Europe by institutional US and other global investors. Nevertheless, any suggestions of a mass relocation of American liberals to the UK in protest at a Trump Presidency are fanciful and it is hard to see the UK/London property markets being moved materially by such behaviour.
More significantly however, is the likely US attitude when negotiating a trade deal with the UK post-Brexit. If the US chooses to make its markets less open to the rest of the world, this could be a hugely negative result for two countries that conduct over £50bn of trade annually. Our hope and expectation would be that common sense would prevail, especially with our view of Mr Trump as being a pragmatist. The last time the UK was run by a female Prime Minister and the US by a showman, the partnership was very strong, and we would look for more of the same if that comes to pass in 2017.
About Avamore Capital:
Avamore Capital is a special situations lender that provides loans to property traders, property developers, property investors, and other property entrepreneurs. Loan sizes are between £0.5m and £5m with larger loans possible in conjunction with its partners. Avamore Capital provides a flexible approach, quick feedback and very fast drawdown, subject to due diligence.
photo source: Quartz