The Bank of England (BoE) has warned that a failure to reach a Brexit deal with the EU could result in UK commercial property prices falling by as much as 48% and residential values dropping 30%.
In a report prepared for the UK government analysing a variety of possible Brexit outcomes, the BoE said that commercial values could drop by 27% in a 'disruptive' scenario and 48% in a 'disorderly' exit.
In both scenarios, the UK is forced to revert to WTO terms, while in the 'disorderly' scenario the UK also loses access to existing trade agreements between EU and third countries and there is severe disruption at the border.
In that environment, bank rates could be forced to rise to as much as 5.5%, according to the 'EU withdrawal scenarios and monetary and financial stability' paper.
Both scenarios would see a significant depreciation of sterling, with the 'disorderly' outcome producing a 15% fall and a 'disruptive' result seeing the currency dive by as much as 25%. The report notes that sterling has already depreciated by 18% since its 2015 peak.
The exit outcomes are compared with the results of the BoE's latest stress test, which hypothesises UK residential property prices falling by 33% and UK commercial real estate prices falling by 40% in a deep recessionary scenario.
The stress test foresees UK GDP falling by 4.75% and the UK unemployment rate rising to 9.5%, under the weight of a sudden loss of overseas investor appetite for UK assets. Sterling might fall by 27%, while the bank rate would rise to 4%.
The BoE noted that the analysis 'includes scenarios not forecasts'. It added: 'They illustrate what could happen, not necessarily what is most likely to happen. Building such scenarios requires making key assumptions about the form of the new relationship between the UK and EU, the degree of preparedness across firms and critical infrastructure, and how other policies respond.'
