Bill Jamieson: Carney’s warning of a house price crash is wide of the mark

Average house prices across Scotland have risen by 5 per cent since April. Photograph: Photo Robert Perry
Average house prices across Scotland have risen by 5 per cent since April. Photograph: Photo Robert Perry
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There’s nothing like a “house price collapse” prediction to rattle the nerves. And when the warning comes from the Governor of the Bank of England, the decibel count of the rattle is loud indeed.

Last week Governor Mark Carney told government ministers that house prices could crash by as much as 35 per cent over three years in the event of a “disorderly exit” from the EU. It would, he said, send another financial shock wave through the economy.

According to reports, he also told the Downing Street meeting that mortgage rates could spiral, the pound and inflation could fall, and countless homeowners could be left in negative equity.

It’s not the first time the Bank has made such warnings. And pronouncements from the country’s central bank are not to be dismissed lightly. Households and firms look to them for guidance on decisions ranging from business investment to personal savings.

So how reliable is the Bank Governor’s forecasting record? Not very, looking back on previous “forward guidance” statements. Time and again, the Governor has signalled the likelihood of interest rate rises ahead, only for the Monetary Policy Committee to hold rates at their ultra-low level. Indeed, instead of a rise there was a cut in the immediate wake of the referendum result.

And it was only a month ago, on 2 August, that the Bank raised interest rates from 0.5 per cent to 0.75 per cent, with Mr Carney predicting that further “gradual and limited” rate rises would follow.

Sceptical wags suggested at the time that, on the Governor’s past forecasting form, a rate cut was as likely as a further rise. But now there could be another “reverse ferret” ahead – a rate cut in the event of a “no deal” outcome.

That would be the most likely policy reaction were the European Commission not to agree to Prime Minister Theresa May’s Chequers proposal, or the UK parliament to vote down a compromise deal. And Mr Carney, whose term as Governor has now been extended to 2020, is already on record saying that the likelihood of a “no deal” Brexit was “uncomfortably high”.

So how stands the housing market in Scotland now? Given that Brexit uncertainty has been a dominant feature of news headlines for the past 18 months, a downturn could reasonably have been expected to set in by now. And our own Brexit Minister, Mike Russell, has not lost an opportunity to warn of the “disaster” that would befall Scotland if we were to leave the single market and the customs union.

But so far, prices have been holding up. According to the National Registers of Scotland, average prices across Scotland have risen by some 5 per cent since April, while the number of transactions is up by around 9 per cent on the level a year ago.

Figures last week from upmarket estate agent Savills also confirmed that Scottish house prices have continued their upward trend, with transaction growth now being seen in the higher price bands.

Faisal Choudhry, head of Savills Residential Research in Scotland, said: “Whilst London and its surrounding commuter areas have been most affected by current political and economic uncertainty, there remains more confidence in the Scottish markets, where there is capacity for further growth in values.”

And in marked contrast to the warnings from Mr Carney, the firm is forecasting a 17 per cent increase in Scottish house prices by 2022. This compares with 7.1 per cent in London and 14.2 per cent across the UK as a whole.

The number of transactions above £250,000 increased from 9,094 in the first six months of the year five years ago, to a record 19,259 during the year ending June. “This,” said Mr Choudhry, “signifies a shift in the market structure, as buyers have been able to consider relatively higher value properties, with the help of low mortgage rates and government assistance.”

As a result, the official UK House Price Index for Scotland has seen positive annual growth for the past 27 consecutive months.

And despite fears that the top end of the market would suffer most from Brexit worries, the number of transactions above £1 million reached 201 during the year ending June, up 41 per cent from the 143 during the year ending June 2017.

Edinburgh’s dominance has grown, representing 60 per cent of the overall total. The annual number increased from 78 during the year ending June 2017 to 120 during the previous 12 months. And it witnessed 9 per cent average annual house price growth during June 2018 – the highest of any major city.

More properties, Savills has found, are selling above £1m in Scotland’s capital, and some areas of the city have had their strongest markets in a decade.

Prices have also risen significantly in Glasgow, where there has been an increase in sales activity across higher price bands, driving average price growth. Country locations are also attracting the interest of a growing number of UK and overseas buyers. For example, Argyll & Bute continues to attract buyers from outside Scotland who now make up 36 per cent of prime transactions over the last 12 months. Favourable exchange rates are adding to the appeal of Scottish property to overseas buyers – particularly noticeable in hot-spots such as St Andrews, where seven of the 12 £1m transactions over the past year sold to international buyers.

Few doubt that in the event of a “no deal” Brexit the housing market, together with economic confidence across the economy generally, would suffer a setback. Its depth and duration cannot accurately be predicted – particularly as a fall in the pound could act as a countervailing influence with overseas buyers attracted by the prospect of price bargains.

We are truly in uncharted terrain. It is possible that prices in London and the southeast of England could be particularly vulnerable. But a 35 per cent fall in house prices across the UK would seem at the extreme end of forebodings. And it makes no allowance for interest rate policy response – once again confounding the Bank’s previous predictions. In these febrile times, forecasting is fraught with danger and Mr Carney’s remarks should be viewed in this light.