Will UK house prices fall by 35% and is that a good thing?

Yesterday the Governor of the Bank of England attended the UK Cabinet meeting to update them on what the Bank thinks about the potential post Brexit economic situation. Typically the main area focused on has been house prices which of course is revealing in itself. Let us take a look at how this has been reflected in the Bank’s house journal otherwise known as the Financial Times.

Mark Carney, Bank of England governor, has delivered a “chilling” warning to Theresa May’s cabinet that a no-deal Brexit could lead to economic chaos, including a property crash that could see house prices fall by a third.

I pointed out on social media that whilst the journalists at the FT might find such a fall in house prices “chilling” first-time buyers would welcome it. Maybe they might start to find a few places to be affordable. So they might well welcome the fact that the FT then remembered that 35% is more than a third!

Among Mr Carney’s most stunning warnings was that house prices would be 35 per cent lower than would otherwise be the case three years after a disruptive no-deal Brexit — which would assume a breakdown in trading relations with the EU.

If you are wondering what would cause this then it was Governor Carney’s version of the four horsemen of the apocalypse.

The property crash would be driven by rising unemployment, depressed economic growth, higher inflation and higher interest rates, Mr Carney warned.

This is where the water gets very choppy for Governor Carney. This is because he has played that card before, and two of his horsemen went missing. Let me explain by jumping back to May 2016. From the Guardian.

The Bank warned a vote to leave the EU could:

  • Push the pound lower, “perhaps sharply”.
  • Prompt households and businesses to delay spending.
  • Increase unemployment.
  • Hit economic growth.
  • Stoke inflation.

Missing from that list is the higher mortgage rates that he had suggested earlier in 2016. Three of the points came true to some extent as the Pound £ fell and due to it inflation by my calculations rose by 1.25% to 1.5%. This reduced real wages and hit UK economic growth. But unemployment continued to fall and employment rise. Also the delays in spending did not turn up. Or to be more specific whilst there may have been some investment delays, the UK consumer definitely did go on quite a splurge as retail sales boomed.

Where the Governor also hit trouble was on the recession issue. This was partly due to his habit of playing politics where he associated himself with forecasts suggesting there would be one. The actual Bank of England view was careful to use the word “could” but the HM Treasury one was not.

a vote to leave would represent an immediate and profound shock to our economy. That shock would push our economy into a recession and lead to an increase in unemployment of around 500,000, GDP would be 3.6% smaller, average real wages would be lower, inflation higher, sterling weaker, house prices would be hit and public borrowing would rise
compared with a vote to remain.

Partly due to his own obvious personal views Governor Carney got sucked into this. It did not help that the HM Treasury report was signed off by the former Deputy Governor Sir Charlie Bean which gave it a sort of Bank of England gloss and sheen. The May 2016 Inflation Report press conference had question after question on the recession issue which illustrates the perception at the time. Then this was added to in July and August 2016 when the Bank of England and in particular its Chief Economist Andy Haldane again raised the recession issue by telling us the Bank needed a “Sledgehammer” response and then delivering it. Or half delivering it because by the time we got to the second part being due ( November 2016) it was clear that the chief economist had got it wrong. But that phase seemed to be driven by a Bank of England in panic mode looking at a later section of the HM Treasury report.

In this severe scenario, GDP would be 6% smaller, there would be a deeper recession, and the number of people
made unemployed would rise by around 800,000 compared with a vote to remain. The hit to wages, inflation, house prices and borrowing would be larger. There is a credible risk that this more acute scenario could materialise.

Did the Bank of England Sledgehammer stop a recession?

Over the past 2 years this has come up a lot with journalists and ex Bank of England staff suggesting that it did. If so it would have been the fastest real economy response to monetary action in history. That would be odd at a time the ECB was telling us it thought the reaction function had slowed, But anyway rather than me making the case let me hand you over to Mark Carney himself and ony the emphasis is mine.

Monetary policy operates with a lag – long and
variable lag, as you know – and if there is a sharp adjustment in demand, in activity, from whatever event, it will take some time for stimulus, if it’s provided – if it’s appropriate to be provided – for it to course through the economy and offset, to cushion that fall in demand. ( May 2016 Inflation Report press conference)

Although he did later claim to have “saved” 250,000 jobs showing yet again the appropriateness of the word unreliable in his case.

Interest-Rates

This is another awkward area for the Governor as he is back to predicting higher interest-rates. The last time he did that he cut them! Still maybe he has learnt something as his critique of a future cut is a description of what happened after the August 2016  one.

“If you cut rates you would end up with higher inflation.”

Public Finances

Moving away from the Governor to the Chancellor he appears to be unaware that the deficit figures have improved considerably.

Mr Hammond said the Treasury would be constrained in its ability to tackle the crisis by boosting spending, noting the country was still recovering from the aftermath of the 2008 crash and questioning the effectiveness of a fiscal stimulus in one country.

Comment

There is a fair bit to consider here. Let us start with house prices which have proved to be rather resilient in 2017/18, and I mean the dictionary definition of resilient not the way central bankers apply it to banks and growth. I thought we would see the beginnings of some falls but whilst there have been some in London the national picture has instead been one of slowing growth. The ideal scenario in my opinion would be for some gentle falls to deflate the bubble.Some argue that it could be done by them being flat for a while but with wage growth seemingly stuck in the 2% to 3% range that would take too long in my opinion.

But house prices are too high and the Bank of England and the government have conspired and operated to put them there. The use of the word “help” in some of the policies has been especially Orwellian as the result of it is invariably to push house prices even higher and thus even more out of reach. So to them a 35% fall seems dreadful and I can imagine the gloom around the cabinet table as it was announced. The Governor would have been gloomy too as the fall would be slightly larger than the rises his policies have helped to engineer as we mull whether that is why 35% in particular was chosen?

So overall a 35% fall in house prices would bring benefits but it would not be a perfect policy. I have had various replies on social media from people who have recently bought and I have friends in that position. I wish them no ill which is why my preference is for the scenario I have outlined. But the housing market cannot be a one way bet forever .

Also let us take some perspective. You see there is little new in the forecast we have discussed today as it has been the Bank of England no-deal Brexit forecast for some time now. So let me finish on a more optimistic note tucked away in the FT article.

However, he boosted Mrs May’s position when he said that if she struck a Brexit deal based on her much-criticised Chequers exit plan presented to Brussels in July, the economy would outperform current forecasts because it would be better than the bank’s assumed outcome.

A reward for his extra seven months? At that point the Prime Minister might have mused how much nicer he might have been if she had given him an extra year.

 

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41 thoughts on “Will UK house prices fall by 35% and is that a good thing?

  1. Better to deflate house prices in real terms rather than nominal terms. People hate being landed with negative equity. So the BOE should go ahead and create some inflation. But realistically the only reason that house prices will fall long term is some reduction in demand, either from overseas buyers and other people in the finance industry in London or perhaps from baby boomers downsizing.

    • Bollocks, your house price inflation is my negative equity. Its been 10 years and they have not deflated them slowly.

      Your claim the only thing that will see prices fall is demand from overseas buyers and those in finance is also complete nonsense.

      A tightening of credit and raising interest rates will see them crash and socialist parasites who think they have some god given right to house price inflation to keep them in a life they are not bright enough to create for themselves through work or genuine entrepreneurism will see the price of their house crash.

      Carney is being kind 35% barely gets us back to 2013 prices which were utterly insane, prices need and will crash by 60% for workers to be able to afford to buy with wages in much of southern England, the 2 decades of parasites being gifted a free ride on the back of house price inflation and rent seeking is coming to an end.

  2. Great article as always Shaun.

    I also expected to see houseprices begin to soften this year. But then the providers of the statistics constantly ‘massage’ the figures.

    Compare July’s figures here:
    https://static.halifax.co.uk/assets/pdf/mortgages/pdf/july-2018-House-Price-Index.pdf

    With July’s figures in the August report:
    https://static.halifax.co.uk/assets/pdf/mortgages/pdf/August-2018-House-Price-Index.pdf

    230280 has been massaged down to 229776 to avoid reporting a monthly fall 😉

    Also positive figures are constantly revised into the negative. The press don’t care about houseprices falling a few months before…..

  3. What effect would the 35% fall have on bank lending books? If their assets are worth less than their loans then doesn’t that equal a bad ending? Or will the BoE just creat money cash to desperately plug another hole? (Sorry for all the Qs)

    • Means those who bought after 2013 will in negative equity … and only if they put a small deposit down. I bought a Vauxhall Astra and some silver in 2013 and i’ve lost money on both, anyone think the govt should bail me out on these purchases?

      If prices don’t come down in the next couple of years Corbyn is going to win the next election, then we will see a return to capitalism when he puts an end to this free handout to house owners at the taxpayers expense.

  4. Carney is a very cunning man, when the country voted for Brexit despite his warnings, he deliberately muddied the waters by cutting interest rates. As you know he went on to claim he saved the country….the master of the counter factual. But, of course, the £ was shoved off a cliff as he warned more was to follow. How much was due to the ‘Brexit’ vote itself and how much due to his pre Brexit warnings and post Brexit interest rate cuts? How were the markets to react given an unbelievably strong, co-ordinated ‘Project Fear’.

    Now, wind forward to Project Fear 2 and the aim is to to hit people where it hurts most and in an area they can understand….house prices…where reality hits them hard and in their pocket. And what will cause those house prices to fall, he says ‘no deal Brexit’, but of course he’s throwing in sharply higher interest rates in there too.

    Mr Carney is an extremely political Governor.

    • Carney has been kept on as remoaner in chief to give credibility to the fear campaign. Not many people will look back at his previous record on this!
      Still no one talks about the cost of remaining in the EU and a few weeks ago I suggested this could be around a £1,000 per family per year. A large part of this was the cost of the removal of our rebate and Guy Verhofstadt has confirmed that in the event the UK decided to stay then the rebate would no longer apply and we would pay a full contribution. Add to this the increased EU budget, a higher exchange rate and the cost of an EU army / defence force and the £1,000 per family now looks highly likely and a lot more believable than Carney’s predictions.
      And remember, this is not money we have lying around spare!

      If you like paying crooked politicians in Romania, Portugal etc to build roads that are not needed and you like subsidising EU farmers etc then go ahead and wish for a rerun. I would prefer that we spend the money in the UK.

    • Absolutely agree, he knows the UK electorate only too well and their fear of losing the “free money” they have made in property is their main weakness. They can be manipulated at will by him and the government and boy has it worked over the years.
      As mentioned below by James, Carney is as cute as a fox, he can’t lose, as if his policies fail he can blame BREXIT and say “I told you so”, and if they work he can claim the the credit, the thing is there are so many permutations of what can happen and how the elites decide to either prevent BREXIT from happening altogether(the fake leave deal as presented at Chequers or its successor), or let it happpen and crash the economy and negotiate re-entry at a future date – it is virtually impossible to predict.
      But you can be sure Carney and May will be working together to steer the ship past any obstacles and keep the UK in Europe no matter what happens.

      A fifty percent fall in house prices is required in my opinion to bring them back to long term levels of affordability where housing costs represented roughly 30% of net pay per month, so all the screaming about 35% falls is is music to my ears, just bring it on.Let’s see how “clever” and “shrewd” those people who kept saying house prices never go down feel then.

      • Yes 50% is the number. Easy to understand. The price should be determined by income from earnings not from printed leverage. Folk who don’t earn should be price takers not “casino winners”,that way they would vote development, for families, for productivity, for success.

  5. By the way, my reading of the Brexit vote economic response was that the executives and senior managers in our companies had literally sucked up all the guff and reined in their investment plans – enough to cause a recession itself if left to its own devices. Meanwhile the bulk of the country felt good about things and went on a shopping spree in the weeks following the vote. When the figures started mounting in Board rooms regarding consumer sales, they reversed those cancelled investment decisions in the following months. Virtually all the middle classes read the mood of the country wrong.

    • Hi hotairmail

      By the time of the November 2016 Inflation Report – when the Sledgehammer of Andy Haldane was supposed to swing again – we were told this.

      “Output grew by 0.5% in Q3. This was slightly lower than Q2 growth and a much less marked slowing than expected at the time of the August Report. The near-term outlook for growth is also stronger. While investment intentions have weakened further since August, household spending appears to have remained robust and conditions in the housing market have been resilient.”

      So they got consumption completely wrong and if they had been happy with their investment forecasts they would have told us how much it had fallen rather than moving to “investment intentions”……..

  6. The thing is that Carney can’t lose. Either project fear 2, stoked by the great man himself, succeeds and house prices crash, in which case he will say “I told you so” or they don’t and he’ll point to his own brilliance in keeping interest rates low etc.
    He is poisonous and a perfect example of why people are voting against elites all over Europe and the USA.

  7. The thing is that Carney can’t lose. Either project fear 2, stoked by the great man himself, succeeds and house prices crash, in which case he will say “I told you so” or they don’t and he’ll point to his own brilliance in keeping interest rates low etc.
    He is poisonous and a perfect example of why people are voting against elites all over Europe and the USA.

  8. If house prices fall by a serious amount, those people who bought under “Help To Buy” will have the biggest negative equity problem, as they overpaid to start with – another misselling scandal?

  9. Just turning to your original question, Shaun, as to whether a house price fall is a good thing, I think that we have painted ourselves into a corner as a country, as follows:
    1. Falling house prices would be wonderful for those about to try to buy; but
    2. I would take a bet with you that the banks have exposed themselves terribly to the housing market
    3. The banks will then stop (even more) lending to productive sectors
    4. People who feel that they’ve lost a lot of money (even if not selling and it’s a paper loss) will probably curtail other spending
    5. The volume of house sales will fall as people have to sell st a loss and this has other effects on spending on household improvements.
    It is such a pity that houses became a speculative investment.
    Completely off topic, but does it not seem strange that RBS can suddenly find £4 billion to buy back its shares as reported this morning?

    • Lending since MMR has required people to be able to repay mortgages at a higher rate, so current crop of borrowers are not over stretched.

      Or there is the BTL who have had to put down at least 25% deposit, so the banks will not lose too much if anything with these savvy investors.

      If we dont get a HPC and people continue to prop up this ponzi with even more borrowing it means they have less to spend in the actual economy so we get a bigger HPC in the future.

      Cant run an economy on House Price Inflation forever, time has come to pay the piper.

  10. This is Project Fear without question.

    IIRC between 1989 and 1996 house prices fell by around 30% in real terms; 15% nominal falls and 15% inflation. It’s not clear whether Carney is talking about real or nominal prices. The falls in nominal prices in the period is only around 2% per annum, really quite modest. However Carney is talking about 35% over three years which would be over double the rates of nominal falls and inflation in the nineties.

    Using the same ratio of nominal/ inflation, in view of the level of leverage that we now have falls of 5% a year over three may not be completely out of court. Inflation for three years, at least partially driven by a fall in sterling, would average over 4% and could not be ignored by the BOE. This would mean that rates would have to go up which would worsen the situation and exacerbate any recession. So this scenario is not completely off the wall although the mix of nominal/inflation component may be different.

    However, as regards nominal house price falls the fact is that the BOE itself has allowed this situation to get out of hand and many believe that they need to fall more than implied above.

    The second thing is that we are overdue a recession in any case and to ascribe all the problems to Brexit is more than disingenuous; it is positively deceptive. There is little doubt in my view that some firms will delay spending until the situation re Brexit is clearer but we will have a recession anyway in the next two or three years and this will be the dominant feature.

    In any recession the fact that we are still on “emergency” rates means that at least part of the toolkit is not available to ameliorate it and this is solely down to Carney.

    If one were being charitable, in my view realistic, Carney is getting his excuses in early and not for the reasons he suggests. The transparency of these excuses is a tad pathetic.

    • I agree, I think Carney knows things are going to grim and he stayed on to protect his reputation by citing these specious effects with wrong causes, to control the narrative and cover his ” free money” culpability.

      • I would posit he’s staying on because

        1, no one wants him – he’s a bust

        2, no one wants the BoE job either as they’re scared of any negative Brexit issues

        Forbin

  11. No, so let’s have a song instead given it will be the end of the the world as we know it if Carney is right about anything. Have a great weekend everybody.

    Eye of a hurricane, listen to yourself churn
    World serves its own needs
    Don’t mis-serve your own needs
    Speed it up a notch, speed, grunt, no, strength
    The ladder starts to clatter
    With a fear of height, down, height
    Wire in a fire, represent the seven games
    And a government for hire and a combat site
    Left her, wasn’t coming in a hurry
    With the Furies breathing down your neck

  12. I’ve said before that I view a 35% fall as positive, BUT, if there was a snowball’s chance in hell it would happen, do you really think Carney would have extended his tenure?

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