UK chief banker warns of post-Brexit housing market collapse

Bank of England chief Mark Carney has warned a hard Brexit may mean a UK housing price collapse. The usual Brexiteers were united in disparagement, but his words carry weight on the 10th anniversary of the last crash.

Bank of England Governor Mark Carney on Thursday reportedly warned UK ministers that the impact of a no-deal (or 'hard') Brexit could be as bad as the 2008 financial crisis, with house prices falling by up to 35 percent over three years in a worst case scenario.

Business | 06.09.2018

As the UK prepares to leave the EU next March such an exit would lead to higher unemployment, a fall in the pound, drive up inflation and in turn interest rates and many homeowners could be left in negative equity, The Financial Times reported Carney as saying.

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"Our job is to prepare for the worst, not hope for the best," Carney wrote in an opinion piece on Friday for The Daily Mail. "By identifying the risks and coming forward with solutions, the bank is working hard every day to get our financial system in shape for Brexit, whatever form it takes."

A no-deal Brexit means a move from seamless trade with the rest of the EU to customs arrangements set by the World Trade Organization for external states with no preferential deals

The bad old days

UK house prices fell 19 percent during the 2008 financial crisis, before rising 38 percent from their low in March 2009 to June 2016, the month of the Brexit referendum and in the two years since prices have risen by a further 7 percent, according to ONS data.

The world's fifth-largest economy is heavily indebted and housing has traditionally been used as a form of asset investment by ordinary Britons borrowing from the banks.

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Carney, whose term of office has been extended until the end of January 2020 to deal with Brexit disruptions, said that if Prime Minister Theresa May struck a Brexit deal on the basis of her 'Chequers proposals' then the economy would outperform current forecasts, The Financial Times reported.

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Hard or soft options

It's essentially a choice of a harder or softer Brexit. Harder prioritizes border control over trade. UK firms would pay tariffs to do business in the EU, and vice versa. The softest Brexit would see access to the single market, or at least a customs union, maintained. That would require concessions — including the payment of a hefty "divorce bill" — to which the UK has provisionally agreed.

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A leap into the unknown

Businesses have expressed concern about a "cliff edge" scenario, where Britain leaves the EU with no deal. Even if an agreement is reached at the EU bloc level, the worry is that it could be rejected at the last minute. Each of the 27 remaining countries must ratify the arrangements, and any might reject them. That could mean chaos for businesses and individuals.

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No deal - better than a bad deal?

If there is no agreement at all, a fully sovereign UK would be free to strike new trade deals and need not make concessions on the rights of EU citizens living in the UK or pay the financial settlement of outstanding liabilities. However, trade would be crippled. UK citizens in other parts of the EU would be at the mercy of host governments. There would also be a hard EU-UK border in Ireland.

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Divorce-only deal

The EU and the UK could reach a deal on Britain's exiting the bloc without an agreement on future relations. This scenario would still be a very hard Brexit, but would at least demonstrate a degree of mutual understanding. Trade agreements would be conducted, on an interim basis, on World Trade Organization rules.

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Limited arrangement, like with Canada

Most trade tariffs on exported goods are lifted, except for "sensitive" food items like eggs and poultry. However, exporters would have to show their products are genuinely "made in Britain" so the UK does not become a "back door" for global goods to enter the EU. Services could be hit more. The City of London would lose access to the passporting system its lucrative financial business relies on.

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Bespoke deal: Swiss model

Under the Swiss model, the UK would have single market access for goods and services while retaining most aspects of national sovereignty. Switzerland, unlike other members of the European Free Trade Area (EFTA), did not join the European Economic Area (EEA) and was not automatically obliged to adopt freedom of movement. Under a bilateral deal, it agreed to do so but is still dragging its feet.

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The Norway way

As part of the European Economic Area, Norway has accepted freedom of movement – something that no Brexit-supporting UK government would be likely to do. Norway still has to obey many EU rules and is obliged to make a financial contribution to the bloc while having no voting rights. Some see this as the worst of both worlds.

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A Turkey-style customs union

Turkey is the only major country to have a customs union with the EU, as part of a bilateral agreement. Under such an arrangement, the UK would not be allowed to negotiate trade deals outside the EU, instead having the bloc negotiate on its behalf. Many Brexiteers would be unwilling to accept this. It would, however, help minimize disruption at ports and, crucially, at the Irish border.

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No deal, no Brexit?

EU President Donald Tusk says the outcome of the talks depends on Britain, citing a good deal, bad deal or "no Brexit" as possible options. However, with both of the UK's major political parties – the Conservatives and Labour – committed to going ahead with Brexit, that looks unlikely.

Downing Street prepares

After the Downing Street meeting, the Prime Minister's spokesman said ministers remained confident of a Brexit deal, but had agreed to "ramp up" their no-deal planning. "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.

The UK is due to leave the EU on March 29, but there is no full exit agreement between Brussels and London as Brexit Secretary Dominic Raab was due to speak by phone to EU chief negotiator Michel Barnier on Friday.

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Meanwhile, the opposition Labour Party said on Friday it will vote against any Brexit deal reached by May. Emily Thornberry, Labour's shadow foreign secretary, told The Financial Times the party aims to force May from office before Christmas. "A workable deal is just not going to happen," she said. 

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Finance Minister Phillip Hammond said on Friday the Treasury would not be able to tackle the crisis by boosting spending, adding that the country was still recovering from the aftermath of the 2008 crash.

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Stress tests

But some have suggested Carney was not forecasting the crash, merely saying what the Bank of England would do in the event of such a fall occuring and was briefing the Cabinet on what preparations the bank was making if that were to happen.

The bank carried out a stress test last November, deliberately setting the parameters beyond what might reasonably be expected to occur and all the major banks passed.

"Carney has made himself a laughing stock in the City with such an outrageous warning," Richard Tice, a Brexit supporter who is also co-chair of the Leave Means Leave group, told the news agency Reuters. "Carney is a political central banker who is talking down the country and talking down Brexit in the hope that people accept a really bad Brexit deal — May's Chequers deal."

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