House prices at risk if no deal on Brexit, says Carney

The governor of the Bank of England has reportedly told the cabinet that the UK housing market could be highly vulnerable to a no-deal Brexit.

Reports from several national news outlets suggest that during a meeting with the cabinet on Thursday afternoon, Bank of England governor Mark Carney cautioned a 'worst-case scenario Brexit' would lead to a property price crash of up to 35 per cent.

According to the BBC, the Bank of England carried out ‘stress tests’ in November last year that found a 33 per cent fall in house prices would occur in a worst-case scenario – where Britain left the EU with no deal, no transition and no government preparation. 

The government released a series of Brexit no-deal assessments on Thursday, to give more clarity to the public and businesses of its preparedness in the event that no deal is struck with the European Union.

A Downing Street spokesperson told the BBC that government ministers were confident of a Brexit deal but had increased their no-deal planning.

The spokesperson said to the BBC: ‘As a responsible government, we need to plan for every eventuality. The cabinet agreed that no deal remains an unlikely but possible scenario in six months' time.’

Moneywise approached the Bank of England for comment but none was forthcoming. 

The Bank of England’s worst-case scenario says that house prices could fall by up to 35 per cent over three years in the event of a messy divorce from the EU. This could lead to homeowners becoming trapped in negative equity if their mortgage debt is higher than the value of their property.Retirees reliant on the value of their property to help fund their retirement could also be negatively affected, as the wealth stored in their homes reduces.

However, the stress tests conducted by the Bank of England reflected a scenario where interest rates rose to 4 per cent and unemployment jumped to 9 per cent. Such tests are designed to be worst-of-the-worst type scenarios. 

Moreover, says Will Hale, chief executive of equity release adviser firm Key: ‘When we think about house prices, we need to bear in mind many different influencing factors. As a country, we are not building enough homes to meet our current needs so demand is likely to remain high; and while we have seen house prices fall in the past, over time, we have seen these offset by sustained periods of increases. 

‘Until a person chooses to sell their property or refinance, any increases or falls are not actually realised.’

The comments from the governor have been met with a dose of scepticism from some commentators. Hale adds: ‘The simple fact is that we do not actually know what is going to happen post-Brexit, as no one has a crystal ball.

‘The Bank of England is responsible for delivering monetary and financial stability so it is its responsibility to look at the implications for all extreme scenarios – both good and bad – but it seems that only the negative assumptions have been picked up in the headlines.’

Henry Pryor, an independent property expert, agrees: ‘Don’t panic, this is highly unlikely to have been what the governor told the cabinet; less than a year ago he explained in detail that the Bank of England had modelled the worst-case scenario of house prices falling by a third, but that this is not what the Bank expects.’ 

He adds: ‘Prices may well slip in the first quarter next year regardless of a hard or soft Brexit - uncertainty just as we had over the Millennium Bug in 1999 will mean many buyers will postpone their purchase until next summer. Unless they are given a discount to reflect the perceived risk they are taking, most buyers will just wait and see. 

‘The main house price indices will therefore reflect these discounted prices, but they will not be of the magnitude that has been reported. The Bank has planned for the worst but is not predicting that this is what will happen.

This story first appeared on our sister website Moneywise

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