"A 35% fall in house prices, as suggested in the Bank of England’s extreme stress testing scenario, is twice as large as after the global financial crash in 2008"
Bank of England governor Mark Carney has warned that a no-deal Brexit could spark house price falls of up to 35% over the following three years.
Following a special Cabinet meeting yesterday, it has been widely reported that Carney told Theresa May and senior ministers that under a no-deal Brexit interest rates would rise as sterling plummeted, causing an increase in mortgage rates.
The Bank's latest stress test, published in November 2017, also outlines that house prices would fall by 33% under a 'worst case' economic scenario.
Although the Bank of England has not yet commented, several sources said Carney compared a worst-case Brexit scenario with the aftermath of the 2008 financial crisis.
Mark Pilling from Spicerhaart Corporate Sales commented: "Mark Carney the Governor of the Bank of England has today warned that a no deal Brexit could be absolutely dire for the UK, and see house prices crash and unemployment soar.
"Recently, lenders have been offering higher LTV rates again, and if house prices were to crash, we could see many of these borrowers moved into negative equity and then struggle to remortgage.
"The warning of unemployed could also have a knock-on effect on people's ability to pay their mortgage or rent, as they find themselves struggling to find work, and we could see arrears and ultimately repossessions start to creep up again.
"Carney has also warned of rate rises; last month's rise is already starting to have an impact while those on fixed rates could face significant shocks when they come to the end of their deals and try and remortgage.
"Ultimately, lenders need to be keeping a close eye on any borrowers who are either already having difficulties managing their mortgages, or have concerns that affordability could become an issue down the line, and intervene now to ensure the best outcomes for everyone."
Andrew Smith, chief investment officer of the TM home investor fund, added: “A 35% fall in house prices, as suggested in the Bank of England’s extreme stress testing scenario, is twice as large as after the global financial crash in 2008, and the causes would also be very damaging to other investment markets. While residential property markets do suffer in a crash, the sector’s usual defensive qualities relative to equities and commercial property would apply to a Brexit-driven crisis, as they have in crises in the past.
“The health of the UK economy is just one factor in determining house prices. Consumer demand and housing supply is also crucial, regardless of the state of the economy. People need somewhere to live and in the UK we are simply not building enough houses to keep up with demand from a growing number of households. Half of owned houses have no mortgage, and a fifth of all households pay rent. In the event of a crash in house prices, rents are more likely to rise than fall – RICS recently predicted that rents will increase by nearly 2% over the next twelve months and 15% in five years.
“For investors in residential property, the outlook for the UK private rental market remains robust. Whatever happens with a Brexit deal (or not), we face a prolonged period of economic and political uncertainty, not just confined to the UK. That said, my sense is that we are probably now close to the point of maximum uncertainty and adverse impact on business and consumer sentiment. One way or another, as the shape of a deal emerges, or conversely the prospect of "no deal" becomes a reality, some of the fog will clear, and decision-making processes will start to adjust to the new climate.”