Mark Carney: 35% House Price Slump “Worst-Case Scenario” of No-Deal Brexit
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Mark Carney: 35% House Price Slump “Worst-Case Scenario” of No-Deal Brexit

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Carl Shave Carl Shave | October 11, 2018

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As the time remaining for the UK government to successfully negotiate an exit deal with the EU grows ever shorter, there are many both inside and outside government who believe that the possibility of a so-called “no-deal” Brexit is becoming ever more likely. But what could “no deal” mean for the British economy and, more specifically, the housing market?

According to the BBC, Mark Carney, current governor of the Bank of England, recently intimated that a no-deal Brexit could have a devastating effect on UK house prices, warning cabinet ministers that in a worst-case scenario, prices could plunge by as much as 35% over three years, contributing to a wider financial shock to the economy. The scenario painted by Mr Carney is in line with the Bank of England’s prior predictions, which last November suggested a worst-case no-deal Brexit could result in a 33% drop in house prices, alongside spikes in unemployment and interest rates.

Mr Carney reportedly told the cabinet that a Brexit-related house price crash could also see hikes in bank rates, rising inflation and a drop in the value of the pound. Such a dramatic fall in prices could plunge countless mortgage customers into a state of negative equity.

While Mr Carney’s warnings make for grim reading, it’s important to note that his comments are not a prediction of the most likely outcome. Rather, they were a presentation of an absolute worst-case scenario of a “disorderly Brexit” – the Bank of England uses such “stress-testing” scenarios to ensure the UK financial and banking system is prepared for the potential impact such an event would have. According to Mr Carney: “Our job, after all, is not to hope for the best but to plan for the worst.”

Speaking at a subsequent event in Dublin, Carney explained: “We have been working on making sure that those institutions that we continue to supervise [the banks], they’re prepared for all potential contingencies. Central to that has been stress-testing those institutions to severe outcomes … That is what you need to do in order to make sure that in the better states of the world that the [banking] system is very clearly and transparently ready for [a harsh scenario] and able to continue to lend.”

While newspapers and other media outlets have made much of the 35% house price crash “prediction”, industry analysts have largely demonstrated a more measured reaction to Mr Carney’s comments. Property market commentator Henry Pryor told the BBC that the Bank of England governor was “not predicting Armageddon, he was not predicting house prices would fall by a third, they are just making sure that if, for some extraordinary reason anything was to go horribly wrong, the bank is prepared.”

A spokesman for the Prime Minister commented: “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.”

While it’s hard to say with certainty how a “no-deal” Brexit will affect the property market, it does appear that Mark Carney’s comments may have been taken somewhat out of context in the reporting by some outlets. While the prospect of a 35% drop in house prices is hardly appealing, there is perhaps some reassurance to be had in Mr Carney’s own description of that outcome as “unlikely”.