While it would be foolish to suggest that the UK economy has emerged unscathed from the 2016 Brexit vote, what does the future hold?
Mark Carney, the Governor of the Bank of England, believes that UK house prices could fall by 35% over the next three years. This doomsday scenario comes as the British Chambers of Commerce reports a downgrade in its predicted growth for the UK economy. The UK economy is now expected to grow by 1.1% in 2018, a reduction from the earlier forecast 1.3% growth. Expectations for 2019 have also been reduced from 1.4% down to 1.3%. What should we read into Mark Carney’s prediction in the event of a no-deal Brexit?
Doomsday scenario
Many property investors believe there is a definite pro-European thread running through the UK media sector. It seems that any positive movement in Brexit talks secured by Theresa May is discounted and all negative comment is highlighted by the press. There is no doubt that a 35% reduction in UK house prices over the next three years would be catastrophic. But how likely is this to happen?
Before we look at various factors which will impact UK economic growth in the short to medium term, how far back would a 35% reduction take UK house prices?
- UK market as a whole return to prices last seen in 2004
- London would backtrack six years to prices last seen in 2012
- Newcastle, Durham and Blackpool would revert to prices from 2003
- Luton would rollback house prices by just over four years to March 2014
The average UK house would fall in value from £228,384 in June 2018 down to £148,449 which perhaps puts it into perspective.
Mark Carney’s track record
Mark Carney moved to the UK from Canada with a reputation which was second to none. It was seen by many as a significant coup by the Bank of England after he managed to turn around the Canadian economy. However, after his honeymoon period he was accused of flip-flopping on UK base rates. Over a 12 month period he revised forward indications on numerous occasions leading to confusion and concern within investment markets. However, how did he perform when it came to Brexit predictions?
An article in December 2013 on the Politico website (https://www.politico.eu/article/mark-carney-eats-humble-pie-on-brexit/) casts a very interesting light on his track record. While appearing before a House of Commons Treasury Select Committee he was forced to admit his previous doomsday scenario for the UK, issued after the Brexit vote, was wrong. He also suggested that:
“Financial stability risks around [the EU exit] process are greater on the Continent than they are in the U.K.”
“There is a tremendous financial services capacity in Britain and even though there will be shortfalls at the point of leaving [depending on the exit arrangement], these are more likely to affect Europe,”
We now have a scenario today where, despite progress from Theresa May, the governor of the Bank of England is forecasting a serious downturn for the UK economy. Whether or not this warning was issued as a wake-up call to politicians in the UK and the EU is debatable. Even in a best case scenario this forecast will impact short to medium term investor sentiment.
UK housing market
London and the South-East of England have been impacted to the greatest extent by Brexit concerns with London reporting negative growth in recent months. This has been offset slightly by renewed interest in the Midlands and the North of England with investors looking to take advantage of the North/South divide. Sentiment will play a major role in the direction of the UK housing market in the short to medium term but let us focus on some of the more positive issues of the day:
- The UK economy is still growing
- Relatively low UK base rates support cheap mortgage finance
- The Bank of England increased base rates to offset strong underlying economic indicators
- Wage inflation has strengthened over the last few months
- Unemployment is at a near historic low
- Relatively weak sterling exchange rates will eventually encourage more overseas investment
- The UK population is still growing with increasing demand for private rental properties
While there is no doubt that a no-deal Brexit would impact investor sentiment and the UK economy in the short term, it is not all doom and gloom.
Conclusion
Mark Carney’s doomsday prediction of a 35% reduction in UK house prices over the next three years has certainly grabbed the headlines. In many ways it feels as though we are backtracking to the summer of 2016 when the same predictions were initially floated. Since then we have seen an increase in UK house prices across the country with London and the South-East of England benefiting more than most.
The fact that a 35% reduction in London property prices would only take us back to October 2012 levels says everything. The suggestion that a no-deal Brexit would return us back to the dark ages is dangerous. This constant doom and gloom could further postpone even more investment in UK business which will create a vicious circle. There are some who suggest the Bank of England has been politicised despite its independence from the government of the day.
When we see the worst-case scenario plastered across media websites why is there no balance with publicity for a best case scenario? Ultimately, property investors will need to make their own mind up, perhaps using short-term concerns to further their long-term investment strategies. As we approach the final flick of the Brexit tail there will be controversy and confusion which will ultimately create strong long-term investment opportunities for forward thinking property investors.
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