Truth or scare? Decoding Carney’s house prices warning
The message of the Governor of the Bank of England in his 10-minute talk to the Cabinet is open to interpretation, reports Anna Isaac
On Thursday, Mark Carney, the Governor of the Bank of England, had 10 minutes to address the Cabinet during a marathon Brexit briefing. One figure reportedly stood out: 35pc. This is the amount that house prices could fall in the event of a chaotic, no-deal Brexit.
It is close, but not identical, to the Doomsday scenario laid out in the Bank’s stress tests, released in March this year, which looked at how the country’s lenders would be able to cope if house prices fell by 33pc.
The Bank monitors the stability of the financial sector and regularly publishes war-gamed situations where the economy is hit by a number of shocks. These are intended to ensure banks have strong enough balance sheets to avoid even the worst eventuality imaginable.
This year’s stress test envisaged the economy contracting by 4.7pc (a catastrophic recession), sterling falling by 32pc against the dollar, inflation hitting 5pc and the Bank hiking interest rates to 4pc.
In this hypothetical, worst-case scenario, rising interest rates could trigger a massive rise in mortgages costs, which would like drag down the housing market. It was dubbed the “no-deal stress test”.
The parameters and results of the stress test, published in March, are not new information. The test was, crucially, deliberately pessimistic; it was not, equally crucially, a forecast.
So is it really possible that house prices could fall by a third even in the most disorderly of no-deal Brexits?
“Such a price fall across the country as a whole is unprecedented,” says Lucian Cook of Savills.
House prices only fell by 20pc in the late Eighties and early Nineties when interest rates were going stratospheric and by about 18pc to 19pc in the direct aftermath of the credit crunch, according to Cook.
“In the 10 years prior to both of those events prices had tripled,” says Cook. “In the past 10 years prices have only gone up by about 23pc. We’re looking at a completely different starting point.”
Indeed, giving a speech in Ireland yesterday, Mr Carney was at pains to emphasise that his discussion about a “dramatic house price fall” was “not a prediction of what’s going to happen”.
Rather, he was hoping to highlight what the Bank was “prepared to do” should the UK economy suffer a very serious shock. “We have used our stress test to ensure that the largest UK banks can continue to meet the needs of UK households and businesses even through a disorderly Brexit, however unlikely that may be,” said Carney. “Our job, after all, is not to hope for the best but to plan for the worst.”
But his choice of words is open to interpretation. Is he saying that the house price crash is unlikely or that a no-deal Brexit is unlikely?
And were the politicians at the Cabinet meeting similarly left confused by what Carney had said? Did the Governor scare them when what he was trying to do was reassure them? Or was he deliberately vague in the hope that the totemic issue of house prices would help pull the Cabinet together in seeking a deal with Brussels?
It is well known that Carney thinks Brexit will hurt the economy and that a no-deal Brexit will make matters worse. The mere fact that house prices appears to have taken up a lot of the Governor’s allotted time suggests that he was hoping to deliver a message.
Philip Hammond has said that his ability to deliver future tax cuts could take a hit if there is a no-deal Brexit. There are few tenets more central to modern Conservatism than home ownership and tax cutting.
One well-placed source suggests that Carney and Hammond had executed a “pincer movement” that was designed to suggest a no-deal Brexit would do for the Tories what the financial crisis had done to Labour’s long term economic credibility. The message being delivered was “It’s Chequers, or else”, the source said.
The meeting also came soon after it emerged that Mr Hammond had convinced Mr Carney to extend his planned tenure by seven months, to ensure continuity during a potentially “turbulent” time for the UK economy.
There is a further question of whether Carney overstepped his remit in delivering the warning of a housing crash, albeit one framed by his reassurance that the UK financial system could withstand it.
On the one hand, the warning may influence the political decisions made by those he was addressing, tricky ground for a independent Bank Governor. On the other hand, many would argue that Carney was simply doing his job: informing our decisionmakers about the consequences of a particular course of action.
It is now up to them to plot that course.
‘Our job, after all, is not to hope for the best but to plan for the worst’