Brexit and house prices: how likely is the worst case scenario?

Brexit and house prices: how likely is the worst case scenario?

Today’s headlines have cast a gloomy outlook of how a no-deal Brexit could hit the country’s house prices, but do we need to take the comments seriously?

Mark Carney, the Governor of the Bank of England, told the Cabinet in a meeting on Thursday that the consequences of leaving the EU without a formal arrangement could be severe on the country’s economy, with house prices potentially being hit by a drastic drop of as much as 25-35% over the next three years.

The Governor also warned that rising interest and mortgage rates, higher unemployment and a drop in inflation as well as the value of the pound could be sparked by a “chaotic” no-deal Brexit, according to stress tests carried out by the bank, while Chancellor Philip Hammond has outlined plans to protect the country’s economy from a crash in the “highly undesireable” event that we end up without an exit agreement.

Looking behind the headlines

However, although Carney’s comments initially seem to offer us a very downbeat prediction of what lies ahead after Brexit, they in fact reflect a “worst-case scenario” option rather than an official forecast of a likely outcome.

During uncertain times, it is necessary for the major banks to look at a whole range of outcomes and their potential impact on the country’s economy. This means that, while the comments have been portrayed as fact by many news sources, they actually portray just one outcome the government must be mindful of, with an official spokesman for the Prime Minister saying the government is planning for a no-deal among other things.

“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,” the spokesman said.

BBC economics editor Kamal Ahmed added: “It was not a forecast. It was an apocalyptic test where the Bank deliberately sets the parameters beyond what might reasonably be expected to occur. The major banks all passed the test, giving reassurance that the financial system can cope with whatever happens next year.

“The Governor believes that a ‘no deal’ scenario would be bad for the economy. But not as bad as the headlines today which are based on a doomsday scenario that is not actually forecast to happen.”

The outcome could be very different…

While the ongoing Brexit negotiations are causing inevitable uncertainty in most sectors across the UK, many reports still show that investor confidence in the country remains high, with Hamptons International research demonstrating an increase in European buyers.

Furthermore, according to Ahmed, while the current focus is very much on the possibility of Britain ending up with a no-deal scenario, a more positive outcome could result in a very different effect on the country’s economy and housing market:

“If there is a ‘good deal’ with the EU, Mr Carney believes there could be a significant boost to the economy as pent-up demand held back by the present uncertainty is released. Investment could rise markedly, he has argued.”

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