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No-deal ‘risks year-long recession, tumbling pound and house price crash’

Britain would enter a year-long recession on a par with the early 1990s, the pound would crash by 10%, and house prices would tumble, according to the latest grim look at the economic toll of a no-deal Brexit.

The UK’s fiscal watchdog warned that Britons would face surging price inflation following a plunge in the value of the pound, but said the Bank of England was likely to slash interest rates from 0.75% to just 0.2% by the end of 2020 to help offset the economic woes.

In its Fiscal Risks Report, the Office for Budget Responsibility (OBR) said that, if the UK crashed out of the EU without a deal on October 31, the UK would be tipped into a “full-blown” recession by the end of the year.

£30bn Amount added to public borrowing each year under a no-deal Brexit
OBR Fiscal Risks Report
But experts said the OBR’s assessment is a far cry from the Bank of England’s doomsday report published late last year and the OBR itself admitted it was “by no means a worst-case scenario”.

The OBR – headed by chairman Robert Chote – said gross domestic product (GDP) could drop by 2.1% over the next year, driven lower as companies cut their investment amid higher trade costs and the wider economic woes.

Consumer spending would also fall as wages are squeezed by the Brexit-hit pound and higher trade tariffs, compounded by under-pressure wage growth, while unemployment would also initially increase – peaking at just over 5% in 2021.

All this would knock the housing market, with prices likely to plummet by nearly 10% between the start of 2019 and mid-2021.

The economy would start to pick up again in mid-2021, according to the OBR.

Its scenario analysis also looks at the impact on the public finances, warning that a cliff-edge Brexit would add around £30 billion a year to borrowing from 2020-21 onwards and around 12% to national debt as a share of GDP by 2023-24.

The OBR added that. while the plummeting pound will give a fillip to exports, this will be largely offset by the immediate hike in trade tariffs.

While the report makes for painful reading, the OBR said its stress tests are not as catastrophic as the Bank’s controversial no-deal Brexit report last November, which predicted an 8% contraction in the economy, a 25% crash in the pound and a 30% dive in house prices.

It has instead based its analysis on the International Monetary Fund’s outcome scenario.

It said: “A more disruptive or disorderly scenario, closer to the stress test we considered two years ago, could hit the public finances much harder.”

It comes as the Treasury Select Committee separately on Thursday said it has asked the Bank and the Treasury to provide updated scenario analysis of a no-deal Brexit ahead of Parliamentary votes before the October deadline.

Dr Ivan Petrella, associate professor of economics at Warwick Business School, said the OBR gives a “much more optimistic assessment of the potential dangers of a no-deal Brexit than the Bank of England, the Treasury and most commentators are currently predicting”.

He added: “I think the short-term impact projected by the OBR is a much more likely outcome than the severe recession predicted by the Bank of England.”

But he warned that a “rushed no-deal exit is likely to have a more prolonged negative impact on the economy”.

Source: Shropshire Star

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A house price crash is bad news for those struggling to get on the property ladder

House prices have rocketed ever since the credit crisis. Soaring costs and stagnant wage growth has meant many the level of home ownership has collapsed among young adults, saving for even a deposit requires years of living at home on a frugal budget, and in general owning your own property seems like a dream. Even the cost of moving home is eye-watering.

So it’s unsurprising that people struggling to get a foot on the ladder aren’t reacting as negatively as the markets to Bank of England governor Mark Carney’s comments about a no-deal Brexit could cause a 35% crash in house prices. However, if we learn anything from the last housing market crash, it is not good news for anyone.

UK house prices do feel like they’re reaching a ceiling, especially in London. The average property price in the UK stood at £228,000 in June 2018, according to the latest data from the Office for National Statistics. Just look at the rapid rise in price since 2009.

Chart: HM Land Registry, Registers of Scotland, Land and Property Services Northern Ireland and Office for National Statistics

In the capital, while prices suffered the largest drop in nine years most recently, it still costs, on average, £477,000. Considering the average wage in London is at £37,000, trying to squirrel enough away for a deposit, let alone get approval for a hefty mortgage, seems nigh impossible.

Chart: HM Land Registry and Office for National Statistics

But a house price crash isn’t what people should hope for. Sure, a market correction would be welcomed but a sudden crash will not be beneficial for people who think they’ll suddenly be more likely to get on the housing ladder.

And here’s why.

When the financial crisis kicked off in 2008, prices crashed but, in turn, banks stopped lending generously. This meant that unless you had near perfect credit scores, a huge deposit beyond the average 5-10% of the property price deposit, then it was very unlikely you’d get a mortgage.

Chart: HM Land Registry, Registers of Scotland, Land and Property Services Northern Ireland and Office for National Statistics

At the moment UK household debt is “worse than at any time on record” and, on top of that, homes in Britain face hidden debt of £19bn—all of which are starting to freak out the Bank of England and banks, to an extent. That’s one of the reasons why interest rates were raised in August.

A severe drop in prices in the housing market will spook banks, as they’re the ones which issue those mortgages and also obviously vulnerable to a downturn in real estate value. They would also be viewing the event with extreme caution, especially it means taking on the risk of lending to people who are earning little but heavily indebted and are at risk of living in a house in negative equity.

So, don’t rejoice just yet. You’re better paying off your debt as soon as possible and being in a better position to build capital and a credit score, than banking on the hope a price crash will be a way into the market.

Source: Yahoo Finance UK