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Foreign Investment in Real Estate is Keeping the UK Economy Afloat

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Some economists fear if the inflow of foreign money were to be shut off, it would cause economic turmoil.

Broadly speaking, the United Kingdom exports far less than it imports with the country’s great demand for goods manufactured in other countries. This may make the average Brit wonder where all the money comes from to buy all these imported goods. The answer is real estate, if you examine the government’s fund-flow data carefully. Foreign investment in UK property is a cash source that is vital to the country. To put it simply, in order to purchase BMWs, Brits are selling Belgravia and trading in Islington to buy iPods. China is one of the largest investors in UK real estate.

The current-account balance shows how one particular country stacks up financially with every other country around the globe. A current-account deficit is when a country, such as the United Kingdom, has a trade gap. A trade gap occurs when a country pays out more than it has in investment income. On the macroeconomic accounting ledger, a current-account deficit is balanced by inflows of capital. Not many countries have current-account deficits larger than the United Kingdom. What is more disturbing is that the current-account deficit in the third quarter was 5.1 percent of GDP. That is the largest it has been since the late 1980s economic boom.

However, some economists are not worried about the trade gap. Lombard Street Research’s Charles Dumas argues that the sterling is too high and property in London is too expensive. He says that a shakeout of both these economic factors would turn things around. Historically, the United Kingdom has always had a current-account deficit that was relatively large, according to European head of research at Cushman & Wakefield, David Hutchings and he is beginning to see signs of it shrinking. Although China is the largest source of investment in England, if they turn off the tap, other developing countries will be happy to step in.

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