Are house prices heading for a 1990s-style crash?

At moments of crisis we turn to history to provide guidance to what lies ahead. With the housing market taking a turn for the worst, it is unsurprising that parallels are being drawn between the darkening conditions now and the last time price falls blighted the land in the early 1990s. We have taken a look at some of the key crash triggers then and now to assess what lies ahead for homeowners.

How bad was it in the early nineties?

House prices fell by 20 per cent between 1990 and 1993, according to the Nationwide building society, and 12 - 13 per cent on the Halifax and government measures. By 1995, they had dropped 30 per cent to 40 per cent in "real" or inflation adjusted terms.

Over the 1990-95 period 345,000 homes were repossessed and at least 2m households fell into negative equity, where the value of the property was worth less than their mortgage. It took until the late 1990s before the housing crisis came to an end.

How do conditions compare now?

Affordability

Then: In the late 1980s the ratio of house prices relative to income leapt from about 3.5 times to nearly five times in a number of years making it difficult for first time buyers to enter the market. 

Now: House prices are at even higher levels relative to incomes. The average home now costs 5.66 times average earnings, according to Halifax, and in the south-east of England the ratio is as high as seven times.

Verdict: A high price-to-earnings ratio is one of the principal reasons why a growing number of economists believe house prices have much further to fall. David Blanchflower, a member of the Monetary Policy Committee(MPC), which sets interest rates, says that house prices may have to drop by as much as one third for house prices-to-earnings ratios to be restored to sustainable levels.

Interest rates

Then: Interest rates were close to 10 per cent for most of the 1980s and at the end of 1989 they jumped to a terrifying 14.875 per cent. Even though the economy went into recession in the early 1990s high inflation means that rates couldn't be cut dramatically. Inflation, as measured by the Retail Prices Index (RPI) reached a high of 10.9 per cent towards the end of 1990.

These high interest rates proved crippling for homeowners.Confidence only began to return after the RPI fell back to less than four per cent and interest rates were cut to just over six per cent in 1995.

Now: Even though inflation is a problem - the RPI is 3.8 per cent, which is higher than the Bank of England would like - prices are rising at a much slower pace giving the authorities much more room for manoeuvre. The MPC has cut rates three times since last December - from 5.75 per cent to five per cent.

Verdict: Interest rates are nowhere near the problem they were at the end of the 1980s which is why some commentators, such as Martin Ellis, chief economist at Halifax, thinks a 1990s-style crash is unlikely.

Mortgage rates

Then: A leap in mortgage rates at the end of the 1980s was one of the principal triggers for the house prices slump. In 1987 the average building society offered homeloans charging a rate of 10.3 per cent. By 1989 the typical rate had jumped to 14.4 per cent, adding about £200 to the monthly bill on a typical £70,000 home. That's the equivalent of about £360 a month, or £4,320 a year, in today's money.

Now: Mortgage rates for new borrowers have jumped significantly over the past year as the credit crisis has struck, creating a payment shock for more than a million people. Homeowners who took out a typical two-year fix of about 4.5 per cent in 2006 face a repayment shock of about £200 a month - £2,400 a year - on a £200,000 loan, assuming they take the average two-year fix of six per cent.

Although this is a smaller jump than in the 1990s many households are hurting, especially as higher mortgage repayments have been coupled with a jump in energy and food bills. People have more debt on credit cards and loans than in the 1990s.

Banks and building socieities have also made it more difficult for borrowers by tightening their lending criteria: for example, reserving their best deals for people with a 25 per cent deposit or the same amount of equity in their home.

Verdict: It's bad, but not for everyone. More than 5m borrowers with mortgages that follow the Bank of England base rate have benefited from a drop in payments since December.

The mortgage hikes have been sparked by the crisis that has hit the financial markets worldwide. The Bank of England, in its latest Financial Stability Review, suggests that the worst of the financial crisis, may be over. If so, homeloan rates could start to fall in the next few months. Borrowers will be praying it is right.

Unemployment

Then: As the UK's economy plunged into recession the unemployment rate leapt to nearly 3m, shattering confidence and meaning hundreds of thousands were suddenly unable to meet their mortgage bills.

Now: Unemployment is at its lowest since the 1970s. Latest figures put the number out of work at 843,000, although there have been some worrying signs that it is beginning to pick up.

Verdict: Fears of an economic downturn, and even a recession, mean that even though the unemployment rate is low there are concerns that the jobs market will deteriorate. A sudden jump in redundancies could shatter already frayed nerves. However, unless there is a big leap in jobless numbers the impact is likely to be only short term.

Housing tax

Then: The seeds of the downturn were sown when Nigel Lawson, chancellor of the exchequer, cut the amount of tax relief allowed on mortgages in his 1988 budget. He made a fatal mistake by announcing a five-month delay before the tax relief cut came into effect. People rushed to take advantage of the relief while it lasted, creating a borrowing frenzy and a house price bubble: prices nationally rose 34 per cent  over the course of 1988 and in some parts of the south east they jumped by 50 per cent. When interest rates started to rise the bubble burst.

Now: Stamp duty remains a turnoff for buyers who are nervous about moving up the property ladder but there hasn't been a comparable tax trigger this time round.

Verdict: Chancellors have learnt from Lawson's mistake. Nowadays controversial decisions are introduced immediately

So what is in store?

A lot depends on whether the Bank of England is right and the worst of the credit crisis is over. If it is, mortgage rates start to fall and an economic downturn isn't severe price falls should be in single digits.

It it is wrong, and the crisis continues, confidence will continue to deteriorate and prices could continue to fall for years. Yolanda Barnes, residential research director at Savills, an estate agent, forecasts a 25 per cent decrease by the end of 2009 if the credit crunch continues.

More from Money Central:

House prices: the 10 most recession-proof counties in the UK

Ten tips to survive a property downturn

The 10 most ridiculous fines of all time

Comments

[John]

Surely houses are three times more affordable now than in 1989. Why?
The ratio of house prices to average earnings is more or less 5 times now as it was in 1989 but interest rates are now 1/3rd of what they were then.

[Richard Boxer]

House prices. In all the debate about where house prices are going I see little or no reference to supply and demand. Unless previous research was woefully wrong we still have a housing shortage (2.5m homes required by 2016) Our new build rate before the credit crunch was below what was needed to meet this need. If supply is cut back now and demand returns then we could see even more dramatic pressure on upward house prices. Is the only relevant factor money supply?

[The Capital Multiplier]

The U.S. housing bust and global credit crisis is unfolding pretty much exactly as The Capital Multiplier newsletter predicted! The U.K. housing bust has also started just as predicted last year. Prudent investors who are fed up of seeing bogus low inflation statistics and disgusted with central bank attempts at bailing out irresponsible banks and borrowers, should visit www.CapitalMultiplier.com and sign up for a Free weekly newsletter to get invaluable insights that you won't find anywhere else!

[Peter Norris Devon]

This time is very different from the mid 80's crash...Then millions of people were losing their jobs whilst at the same time, mortgage payments were going through the roof 6% vs 13%. A very painful time. What might make this a crash is that some parts of the media seem keen on one.

[mathew Drain]

Is it not right that over 500,000 people lost their jobs in the building industry during the 90's downturn, without all the people losing work linked to the building industry, now that several big house builders have stopped any new sites not already under construction they will not need the staff further inflating the jobless number, added with the thousands of financial jobs going in the city and the lack of need for employees and falling rents in the commercial property sector there is going to be much higher unemployment and thus higher reposession rates contributing to much lower property prices.

[Lee Willis]

"Verdict: Chancellors have learnt from Lawson's mistake. Nowadays controversial decisions are introduced immediately"

or deferred until the chancellor in question has been promoted to PM and the change becomes Somebody Else's Problem ....

[Dean]

OK - we don't have the abolition of tax relief as a trigger this time, but there are several new triggers coinciding to kickstart the downward trend (aside from the Credit Crunch); introduction of HIPS, changes in the capital gains rules, death of buy to let mortgages and crash in commercial property prices, to name a few. Oh, and change of Prime Minister for one who looks like he's not really up to it.

[Ryan]

You’re missing two important points here:
1. History rhymes it doesn’t repeat itself. This housing stress is different because there is no interest rate shock. It is weaker than before because it’s collapsing under its own weight, leaving it extremely vulnerable to exasperation by future shocks, whether they be currency, interest rate, consumer spending, job related or whatever.
2. Real estate is no longer local. In isolation if the UK property market falls a bit, it doesn’t make much of a dent in the big picture. But it’s falling, or due to, in every country with flushable toilets. This is the beginning of a very real external shock mentioned in point 1, namely a global consumer slowdown, but it’s only the beginning.

[David Smith]

You didn't discuss the sky-high level of indebtedness of borrowers, both mortgage and other credit. How can this analysis make any sense without that?

[Peter Forth]

There was an earlier comment about supply and demand...of course supply and demand are a factor in housing prices but you must also look at the ability of the people who are making the demand to pay. If your median income cannot support support the mortgage payments for a house with a gigantic price tag, it doesn't matter that you want to buy it.

You guys sound like people in the US 12 months ago. Oh no, prices will never go down here! Newsflash - your home price to median income ratio is far WORSE than the peak in the US. Sorry to say but you've got a long way to fall still.

[John Anderson]

Without a doubt, the media is playing with the confidence of millions.

One wonders if some sections of the media have a political agenda. God forbid!

[Alf]

Lets hope the BoE is right with its prediction that the credit crisis is nearly over. The rather big cloud over this judgement is that the banking system is extremely reluctant to quantify its exposure. Oh and inflation it seems is knocking quite firmly on the door. I would hazard a guess this is chapter one of an all time epic.

[Colin]

"Chancellors have learnt from Lawsons mistake" errr 10% deferred tax?!!

[Bear of Little Brain]

Surely, what is different this time is the buy-to-let market, which seems to have enjoyed the kind of tax benefits that were once embedded in tax-deductible mortgage interest. If there has been a large number of loans made in the last couple of years for BTL, but on dubious documentation and unrealistic expectations, panic selling could quickly correct this market. We'll see.

[HP]

Why panic? what ever the variables the fact is this, in 10 years the prices will be higher, why because there is and always will be a shortage of good quality homes. People do not favour new builds so they do not fill the gap, also the old builds are surrounded by amenities. The other reason not to panic is the jobs that do go will mostly be those occupied by casual labour from abroad, who don't tend to be home owners. There will be a a blip but it will be around new builds, flats and over exposed land lords. Furthermore if i dont sell then my neighbour will not so you then increase the shortage.

[cyrjim]

There is no real reason for the fall in house prices other than that it suits the government and banks to have a breather. For ten years the rise in house prices has been remorseless and so it is time to stand back and have a rest. It is self regulating. It emulates life. Tides, moon, seasons. Weather pressure systems, where you have a high followed by a low. No one should be surprised. Prices will drop for a couple of years then level off before rising. Time now keep things rolling along without any great expectations, and go fishing. In five years jump back on the wagon and continue to make hay while that sun is shining.

[Ron]

I think that the article failed to emphasize a major problem that exists today, which did not occur in the 1980s and 1990s, and that is the financial LIQUIDITY of banks. Going forward over the next 2-3 years, in order to increase lending quality, financial institutions will be extremely cautious about higher risk lending. All bank credit rating agencies pay particular attention to banks' property exposure, which is considered higher risk. Bank lending is the oxygen of the property market. No matter what the taxes, interest rates and other factors are, there cannot be property demand without bank lending to the property sector. Lots of supply and thin demand equals falling property prices. These tightening bank practices always have considerable lag to take effect, so expect prices to fall substantially over the next 2 years.

[Jon]

Supply & demand does not drive people to spend more on something than they think it's worth. Just because there might be a "shortage" of houses (which I don't believe there is- how many new builds have been going up around me that aren't selling? And how many houses just aren't selling on rightmove?) it doesn't mean people will pay silly money for a poor house.

All my friends are late 20s with good jobs, and not one of them has bought simply because they cannot afford it. It is unsustainable as it is.

The problem with these current housing price drops are that there are no stupidly high interest rates, lower inflation than 1992, lower unemloyment, etc and house prices are STILL falling. If the above starts to change, we are all in for a bad time. The current rate of drop does not suggest that it's just going to flatten out- it's a steep curve!

Finally, concerning repossessions- in the first year of the 90s house crash, these were at 0.17% of houses in 1989. Last year they were at 0.23% (and this excludes any repossessions which aren't mortgage related)- the picture is worse than it was then. It is a slow process and it will take some time for us to see the real dark effects of the current problems- I'm guessing 10% drop this year, 15% next, then flat for a few years. A long time before any increases. London to be the biggest hit, as it is the most over-inflated. My workmate just sold a place for 15% below the estate agent valuation in london. The worst is yet to come.

I'm sure people will keep denying it (vested interest?? Homeowner?), such as halifax and nationwide- from "a modest in 2008" to "stay flat in 2008" to "modest falls in 2008" to "a single digit percentage fall in 2008". Very clever! Just keep reacting to every month's information! Genius.

[Citizen Smith]

Brilliant! Down with capitalism!

[Michael]

Fundamentals are stated above plus land is limited, the number of families (including single individuals as one unit) is rising, immigration is being encouraged and is required, the property investment community is significant, and housing is now a valid investment for a pension plan. No bubble in the UK. Problems come in 15 to 20 years time when all these factors work against price increase.

[sam p]

let me tell you my views on the btl market. first of all this correction will sort the men from the boys. but i think these uncertain times are making the men cry as well.

i've been a successful property landlord and devolper for the past 6 years. i expanded from 1 property to over 200 in over a 60 month period. money was easy to obtain and the rising property client fueled my ambition. over the last 7 days i have gone into panic mode as finance is no longer available and houses prices are in a downturn spiral. i know very well that if the banks dont lend and rents dont increase then do i hand the keys back to the bank and say thank you . my point is sweet and short . the banks are now sending the uk into recession. it wont be long until people start losing thier jobs and in return thier homes. alot of people are now suffering . the banks need to assess risk responsibly and kick start the economy again or we are going to be here for a very long time. maybe 5 to 10 years. if not longer.

[Pat]

This article, like so many others, confuses the late 1988 slump and the early 1990’s negative equity crisis.
In 1988 we had a remarkable bubble develop after the budget caused by the plan to abolish double tax relief for unmarried couples, bubbles always burst
In the 1990’s the world slump and rising unemployment, coupled with fragile confidence from the 1988 debacle and a rapid interest rate rises lead to further falls
What we are in, at the moment, is something like 1988, the issue is, will the storm clouds now gathering over the world economy in turn tip us into a recession or worse.
One final thing.
If my inertest rates are, say 10% and they rise to 15% as in the 1980’s then very roughly my payments go up 50%
If my inertest rates are 3% and then go up to 6% may payments have doubled

[David Nammory]

There is no mention in this article of several crucial players in the housing market:-
1. The Buy to Let investor. With Capital Gains tax now 18% a number of these investors will sell while they can.
2. GORDO's promise of a further 3 milion homes to be built.
3. The huge overhang of unwanted flats festering in our city centres.
These flats were built by government encouragement and is a momunument to shamefully inept and wasteful policdy decisions based on dictum, rather than an understanding of what homes people actualy want to live in. Is there any hope while these fools govern us???

[M GRAY]

The housing market will continue to suffer for at least twelve months. In a matter of weeks the market changed from being consumer driven to lender driven. Whether interest rates fall or not it is unlikely to be truly reflected in a change to your mortgage payments as lenders have not been passing on interest rate cuts to their customers.

The Northern Rock crisis will still impact on the market for at least another two years. Many of the borrowers with Northern Rock mortgages will not be able to find a new mortgage and many will face a payment shock that may match that of the 90s.

[Andrew]

Things are definately looking bad.

My 2 bedroom flat is the cheapest in town and the estate agent can't even get people round to view it!

The real trouble is that all the people in their early twenties have thousands of pounds worth of university debt and no equity. Unless you have wealthy parents getting a house before thirty is going to be impossible.

[Robert Hardy]

Another factor that has not been thrown into the mix is that large numbers of the young first time buyers who underpin the market have thousands of pounds of student debt and if they work in the public sector have fixed below inflation pay increases set for three years to come. If you are sanguine about job cuts then consider the spin off consequences of financial belt tightening, how many of the service companies dependent on city largess will survive, all those design consultancies media companies, a whole raft of small high income businesses, and with them the restaurants, coffee bars, wine bars etc. Furthermore in previous world recessions money had ultimately nowhere else to go but the major Western economies, that is no longer true. If we lose the easy money it might be very much more difficult to get it back.

[Trevor]

How can you compare affordability versus the early nineties without even so much as a mention of MIRAS?

It puts the +ve spin from Halifax into a little context.

[Neill]

If there is no work for the recent immigrants, many will simply return to where they came from.
Additionally have you seen the number of indiginous Brits leaving for NZ and Auz. I thought my age at 42 NZ would not want me. Punched in my details (Engineering degree etc) and found that I easily had enough points and more.

Additionally supply may miraculously increase especially if many of the second investment houses or repossessed unoccupied BTLs come onto the market.Thats the supply and demand argument taken care of.

This leaves us with the fact that a house is only worth what someone is able and willing to pay for it. To be able to pay requires most people to earn directly or indirectly money from adding some value to some thing in a global market.

That is what is going to dictate what happens to house prices eventually.

Additionally few people have cottoned onto why there is a lack of money to lend in the UK now. We have been a nation of borrowers not savers. We have been using the savings of Asians and Germans, through buying bundled mortgages, to buy our houses, cars, clothes etc with.

When sentiment for the pound is so bad, why do I want to invest in the UK. After all if I converted my Euro to Pounds last year and lent them to someone to buy a house, I have lost over 20% of the value of my Euro's. Great compensation for the 5% I yielded on Interest rates!

[clare walker]

Nearly Over?? We have not even scratched the surface yet! Without first time buyers. Unfortunately we have no Market. I am 25 and it was hard enough to get a mortgage 2 years ago, fortunately i had my parents help..What happens if you have not got this luxury...Save ???
Is that after we have our wages deducted from Student Loan, Tax, council tax,National Insurance, Increasing Rents,High Utility Bills, Ever rising food prices, petrol....The economists who predict timescales when it is going to be back to normal.....Try visiting a few places outside of London when gathering information.

[harry e]

A very congested island. Very low interest rates. High employment.

Tell that to the Japanese.

[Rob]

What shortage of housing? I don't see swathes of people on the streets and I don't see letting agents with no properties to let. Some of you guys are really sucked in by dodgy politicians and VI's.

It's a credit bubble causing a property bubble!! And as the credit bubble has popped big time, I'll leave you to work out the rest.

[Andy Johnson]

"Are house prices heading for a 1990s-style crash?"

No. It will be worse this time.

It is not primarily about interest rates. It is about the rate and extent of the build up of debt.

Under conditions of high inflation, thus high interest rates, this cycle is short.

This time inflation has been low and so have interest rates. Thus debt has built up for longer and to a greater extent.

The cycle is symmetric. Since it has taken over ten years to build up the debt it will be ~ the same time to dismantle it again.

Because inflation is low the nominal reduction in housing asset values will be similar to the real reduction.

Thus, a price fall of ~ 50%.

Simple, once you analyse the factors involved.

[NR]

I own properties in both the UK and in Australia, 2 in the UK and 4 in Australa. And my credit exposure is very low, below 13% of values. With the fall in the pound against the Oz dollar, the idea of bringing Australian dollars to buy in the UK is getting rather attractive, once the pound has bottomed out. The property market here is reliable as there is limited land and high population density. In Australia you dont have the same restrictions unless you are buying in city centres (hence the high prices in Sydney and Brisbane centres).

The UK market, because of these fundamental factors, has less room to fall. And globalisation means that the UK market is not just open to UK investors. Just as the Australian market has a lot of Hong Kong and other overseas Asian investors.

I would say that as long as you are not in it for the short term, and think about what you are buying, the property market is always going to be worth being in. For those who are renting - ask yourself if your rent is 1.5 times the mortgage you would pay. If it is, go for it and each month put away the extra 50% in an account for times when the interest rates go up.

If times get tough, learn to economise a bit on the nights out and eating out, shop on ebay for clothes and have fun with cooking at home for friends and TV. Dont let the market and advertising run your lifestyle. Remember it is about the pursuit of happiness, and the basis of that is control over your own life.

Good luck.

[Abdullah Dawood]

Boom and bust is a feature of today's economies, so we need to rise a level and look at the wider picture. Simplistically, mortgages exist to buy property but a more fundamental question is: should property be any different from other products we buy without borrowing? The lending culture is a profiteering culture that results in high prices of everything and thus destroying the real economy - hence discussions about the price to earnings ratio and so on.. After decades of emotional unrest about interests rates and inflation.. we need to smell the coffee and consider the alternative, a world without profiteering lending.. and what this new world might look like, some features: people borrow from each other, prices fall to affordable levels (what people 'really' can pay), repossessions drop to zero, banks don't get interest from borrowers any more, taxes on property becomes less because prices are less, construction becomes cheaper and building companies make less profit, rents come down, people breath sighs of relief and don't have to become experts in macro economics!

[nick]

I would just like to congratulate Andy Johnson on the most intelligent post i've seen on these forums. Wise words my friend!

[Celso]

How about supply and demand???? Number of houses available and number of people in need of one?? Surely it has something to do with prices?

[blogsouthflorida]

…and where there are down markets in stocks or real estate, savvy wealthy buyers step in to take advantage of great opportunities. In South Florida, the depressed housing market coupled with the weak American Dollar has created a great climate for the luxury oceanfront condo market. Europeans are bringing cash and obtaining prime luxury real estate for 50 cents on the dollar.

[brian]

if you go out on a binge, you will have a hangover. the bigger and longer the binge, the bigger and longer the headache. in the words of paul volker in a recent speech to a ny bussiness forum, "this crisis will be the mother of them all" the biggest bubble ever and the loudest bang to follow. property is more than likely to fall 40% from the peak !

[Rich]

I hope house prices drop a good 30% or so and then maybe I can get myself onto the property ladder!

[Hugh Reid]

Regarding the supply of housing, here in Glasgow it seems interesting that the vast majority of new housing is 2-bedroom flats. These are of no use to families, so must be aimed at either 1st-time buyers or buy-to-let. It might be interesting to see what happens here. If builders drop prices to encourage sales, will this have a knock-on effect on the rest of the market?

[R. Istbear]

A poster (John) says we will avoid a crash this time because Interest rates are lower than in the Great crash of the early nineties. Lower they may be but house prices are much higher in relation to earnings. Better to borrow 3 times salary at a high rate than 10 times salary at a low rate. The reason we have bubbles followed by crashes is that most people fail to grasp basic economics. As far as avoiding a crash goes, its already underway and is unstoppable.

[Paul Fay]

Two points.
N R suggests buying if the cost of renting is 1.5 X mortgage. In my world this is a dim and distant memory. Mortgages are typically 2 to 3 times rent, hence it makes no sense to buy. As someone who sold tgo rent, the interest on the equity virtually pays my rent allowing me to save for when prices come back down to earth.

Secondly, no one has picked up on the point that if people once needed a 5% deposit to buy a property but they now need 10%, this in effect HALVES the value of the property that they can buy for any given deposit. For those who have depended upon 100% mortgages - forget it.

I don't profess to know how far this market has to fall, however, I believe that it will fall.

[Poppyseedbagel]

Not only do you have to factor in far greater indebtedness this time around, there is also the fact that lending multiples have just gone back to 'normal' - when we bought our house back in 1987, as young chartered accountants, we could only borrow 2.75 times joint earnings, with a 10% deposit required. If we'd been borrowing in 2007, I bet we could have had a loan of at least 100% on a 4 or 5 times multiple.

The recent lax lending meant that the bubble expanded further than in the 1980s, and means that a relatively small increase in interest rates will have a far greater impact on some borrowers because they have borrowed a greater multiple of their salaries.

It surely also means that even if you want to buy a hugely expensive house now, you can't actually borrow the money, as the lending criteria have tightened. This was also not particularly mentioned in the article. Prices have to fall sharply to fit with the return to sensible lending practices.

[Guru]

What is happenning now is nothing more than the final stage, of a scam designed to rob the middle class of their wealth, this is how it is done.
1. disconnect the money supply from all inflation hindering backing, i.e. gold, silver etc.
2. lend as much unbacked (fiat) money to whoever is willing to take it, this is used to buy homes, cars etc.
obviously you can make it easier to coax people into the trap by lowering interest rates to ridiculously low levels.
3. When enough assets have been bought with the funny money (created out of fresh air, with no backing), THE MONEY LENDERS begin to deflate the system, raising interest rates etc, this makes it harder for people to pay their depts.
4. When people cannot pay their mortgages/loans etc, take possesion of the items bought with the worsthless/unbacked money.
5. ITS SIMPLE REALLY, WHO-EVER PRINTS THE MONEY EVENTUALLY OWNS EVERYTHING.
AND BY THAT I MEAN THE SHAREHOLDERS IN THE BoE, which is nothing more than a PRIVATE BANK, RUN BY PRIVATE INDIVIDUALS, TO MAKE PROFITS FOR THEMSELVES.

[Phil]

Statistics! The building societies are reporting annual figures. However, if you look at the last 6 months, there has already been a drop of over 10%, nearly 2% per month. The annual figures disguise this with the better, older figures holding up the stats.

Do you think house prices will increase or fall in the short term? Lack of confidence, expectations of falling prices and hard to get mortgages reducing real demand.

There's only one way from here. A huge crash. Historically, the fastest turn around has been about 3 years. We're only 6 months in.

High prices have been inflated by affordability because of comically low interest rates and easy to arrange credit.

Get your debt paid of fast because tough times are coming. High street spending will suffer, then the economy and then jobs. Incidently, Blair got out before the bubble burst to leave someone else carrying the can. Poor old Gordon.

[Adrian]

Sentiment will play a far bigger role than people make out.

People are seeing that house prices can go both ways (once again) and that it isn't different this time. No matter how you dress up the figures, houses are seriously overpriced. A correction is overdue and needed.

When an average person cant afford an average house there is something wrong.

[cmlloyd]

Guru has hit the nail square on the head.

What we have to do is get the power to create money back in the hands of the populace and scrap the (privately owned) central banks.

It's happened before and it needs to happen again.

As for the housing market, 40% down on peak prices over 30 months, minimum.

[Grant Wilson]

How are people not going to loose their jobs? How many were created by this boom? How many will loose their real estate related job?
Money is drying up or being spent on petrol,food etc...not much left for extras -so many shops etc.. are going to close -then the knock on effect... Things are going to get very nasty.

[John Henry]

It's different this time.

Everything will turn out just fine.

[Donald Last]

I find the complacent comparisons with the 1990/1993 futile. The fact is that oustanding personal debt at that time (mortgages, loans and credit cards) was about equal to personal disposable income. In earlier years it had generally been blow PDI. Then in the decade up to 2007 this debt went parabolic until it is now 50 per cent greater than PDI. Outstanding mortgage debt is actually equal to the value of UK GDP. This is ridiculous and completely unsustainable. Future potential real growth in UK incomes and productivity cannot possibly sustain this debt.
Thus, the point about interest rates being so much worse in 1990 is irrelevent. Incomes were inflating at that rate too in those days. It is the massive weight of debt that matters now.
One must remember that the cost of replacing the average house is way below the price at which the property is selling. So the market value is mostly hot air: it has been pumped up by debt. People are really bidding against each other for a plot of land not a house. If far more land were to be released this false value based on the restricted supply would plummet. Equally, when people no longer have money thrown at them by the banks and mortgage companies, the magic of ever-rising land values suddenly evaporates.

[Gary]

I find it ironic that in this technological age, after the booms and bust of the past and all the learning we should have captured, we are faced with this set of challenges; housing, food and energy.

Cameron wont need any policies in the next general election to get into power. Brown may have intended to obliterate the boom and bust economic cycle, but he has contributed to the boom and bust political cycle. ultimately the average working class man in the street will be fearing for his job, his home and his future over the next 5 years

[Les-Bos]

i dont really care what happens, as long as i have a roof over my head. (which i have as i have no bad debt)

[Alan Jones]

If you cannot afford your Mortgage and you are still working, you have been miss sold by your broker or Bank! Sue them.

[Sueco in UK]

I am so happy that I am renting!!
My rent is 50% of what a mortgage would cost me, 72% of interest only (based on 6% interest and 10% deposit, rent is market rate, via an agency...).

[Jason]

HP, re "Why panic? what ever the variables the fact is this, in 10 years the prices will be higher"
I suggest you google oil prices, take a look at the graph, look at how that line is going up....it will never head south! the online graph with a downward incline related to oil is one with the heading 'Reserves'. Hence the world is in for a prolonged reorganisation at best and economic chaos at worst, house prices will not be most peoples concerns in ten years, the cost of food and energy will!

[carole chapman]

The points relating house prices to income fail to take into account how the sharp increases in essential spending eg petrol, council tax, food etc have limited the amount left over to pay for housing. When you add credit card and store card repaymnets into the mix, you see that there is no buffer zone. Additional price hikes on living costs will make it impossible for some people to repay their mortgage. You can already see this happening as people are starting to use credit cards to pay for mortgages and food bills. This used to be called robbing Peter to pay Paul. The crunch is coming.

[Anne Kent]

About two years ago I saw Mortgages advertised for as little as 2.0% for a discounted period of two years. They are now 6.0% which is still very low compared to rates in the early 90's of 14%.

However what appears to be missed is the relativity. A mortgage jumping from 2% to 6% is going up three fold, whereas one going from 12% to 14% is an increase of just over 10%.

In the nineties, if mortgages had jumped from 10% to 30% things would have been dire whereas in reality the 2% to 3% increases were for the most part born well although some were unfortunate in losing their homes it was only a very few and out of those few perhaps some would have lost them in any case regardless of the rising rates.

I believe the situation we are now in is far worse than the nineties as this has been conceived whilst we still enjoy low interest rates and high employment.

In reality there is little execuse for it to have happened at all. The cause of the problem is that everyone always pays for property what they can afford, not what it is worth!

If the Government wants to stop this happening again it should adopt a policy whereby Bank Base Rate can only vary as low as 6% and as high as 10% with the optimum being 8%.

They confuse inflation with costs and although it works well when things are going well it causes havoc when a bubble bursts.

Just a thought......!

[RJCDC]

Its already bad down here in the South West - recent auction results: 40 out of 120 houses sold. I've just had an offer of 205k accepted on a house that was on the market at 300k in September - its now a reposession...
Two things are causing this: reduced flow of money and a very negative sentiment, which will drag prices down 10% each of the next two years....

[Galloping Inflation]

BUSTER BROWN has brought about the bad debt crisis. By trying to delay a depression for political reasons he has brought about a recession.

Do you remember his five economic tests? Here are the reults.

Stability – zero
Economic growth – zero
Strong pound - 18%
Inflation + 15%
Negative house equity -30%

Because of the Buster Brown/Blair regime we are moving from the subprime to the ridulous.

Lets have a gold standard for the global age where governments and bankers cant cheat on currencies.

Galloping Inflation

[e skelton]

So the difference is that this time theres been no 'shock'? Well the collapse is happening without one, so what if one comes?

[my2centsworth]

Good job house prices will fall ~50%. What happens next they remain the same forever? 3 steps forward 2 back, never forget. I recently purchased based on my affordability and I am a low income earner. What many ftb's forget my home again one day will be way more than I just paid. How many of my fellow ftb's are going to kickback and wait to jump on later, I would'nt like to be a ftb @ 40, you got to pay the mortgage and have kids before you reach pension age.

[Dave]

There probably won't be a crash although it will be good for me if there is one then I can buy!!!! There will probably be years where people will be in negative equity coupled with zero to negative growth, with uncertainty in the economy people will think twice about buying. There are parallels to what happened in Hong Kong a decade ago when the property market collapsed and bottomed to in places -50% before a slow rise.

One thing I remembered from the 90's was that there were areas in London and the South-East were you could moved to and was affordable, that luxury is no longer the case almost everywhere in the South East and London is too pricey.

[Phil A]

Your comment on unemployment being 845,000 is based on government statistics a.k.a. Lies!- You forget that because unemployment benefit ends after 6 months the number who moved onto disability benefit has risen from 800,000 to 2.5Million. The REAL number of unemployed is STILL 3MILLION +.

[Fred Sly]

"it doesn't mean people will pay silly money for a poor house."

That one had me laughing out loud. Why are prices so high now if it hasn't already been happening?

[Edward from Solihull]

I feel there are some key facts displayed in this blog, though the key issue is the hype being given by all media / press.

We've had it so 'good' for over the last 10 years and now it's 'not so good'.. we need to be sensible in dealing with a drop in house prices and the rising cost of living (in some areas of our lives).

Too many people have benefitted from our boom culture and stupid borrowing on cards, loans and mortgages. I have little or no sympathy for those that have.

Live within your means and save for a rainy day. That rainy day is coming and I hope you've saved!

[P.Campbell]

I wonder how many people who are ranting about the cost of mortgages, debt , cost of living etc.will be jetting off to far flung places for an annual holiday.Plenty I would imagine, and it wont be saved money they are spending.Just put it on my card ol` boy ...pay later.Ho HUM!

[Ben Robinson]

These comments make me laugh. It's a chance for the poor and unsuccessful people who have made a bad job of their lives to wish the same on others who have done well.

Ultimately property will rise as it's index linked to population, which will rise as that is linked to our genetic heritage. One must make sure one can weather this tea in a stormcup and there will be cheap, easy pickings at the other side.

I made a killing in the last recession, just keep your head and ignore all the paupers and bleaters.

Regards

Ben

[wyn morgan]

There is only one person in the country responsable for this!played the uk as if it was a board game for his own personal gain in becoming a priminister.GORDON BROWN,YOU ARE JUST USeless,this man is very incompident,he wont go,I say drag him out!!BEFORE HE BLOOWS UP THE LAB!!!

[rob]

There are a lot off very good points people are making here but if prices do drop 15 or 20 % one thing is for sure, those of you that are renting will find that the owner sells the property that he or she has made a modest gain on and the purchaser will want to live there not rent it out, this leaves you with the dilemma of either finding another rent or trying to buy a property yourself, this will happen over the next couple of years and will fuel the next property boom (you, the renter will then be on board) the only people to loose out will be the people that have to or want to downsize their property, usualy this will be the older generation who can easily afford to take a paper loss, so , the only real loosers in this (as in the past ) will be people who have to sell because they have over stretched themselves and/or lost there job and cant afford the mortgage any more. The drop in house prices without a large hike in interest rates (even with rising retail prices) should not in itself cause mass hysteria and the need to sell the property even if you do go into negative equity.
Sit tight on what you own and weather the storm for a couple of years, you know it makes sense!

[Caroline]

I work in higher education (and finished top of my graduation year), I'm over 40 and have never been able to afford a house... if house prices were to halve(to say average £100,000) an "average" house price would remain 5 times my annual earnings and I would still be unable to buy a house. How many others are in a similar position?

I commented on the bleak outlook for the world economy and its relationship to house prices last year and other bloggers thought I was being unreasonably negative. But much of what I was predicticting (food and energy inflation etc) is indeed having a slow but steady impact. And this is, I think, just the beginning. I saw the BoE's inflation predictions showing improvements in 2009 but I don't think they really appreciate the inexorable (but lagged) effects that inflation in PRIMARY sectors (food, fuel, ores and minerals) will have on the global economy. As the dominoes impact each other the effect must flow through secondary and tertiary industries and impact both confidence and bottom line. If banks experience more bad debts they will grow still more cautious in their lending. No money, no market.

[Andy M]

Forget the governments' inflation figure of 3.8%. It's meaningless GB having altered the indices of measurement so many times as Chancellor. Real inflation is much higher. Don't bother reading the housee price figures of BoE,Halifax etc that's like the captain of a ship telling you where he's heading by looking backwards. The UK is in line for a house price correction. A lot of the rise of the last ten years has come about because the government has given 1.2 British passports to immigrants who have been given a lot of the public sector housing. Additionally over 1.2 short term immigrants have arrived.(See Immigration Watch International)Altogether a total of immigrants larger than the combined cities of Sheffield, Derby, Nottingham and Leicester. They didn't bring houses or tents with them did they? This is what has created the BTL market which will be left to take the strain of the governments failed policies on immigration and house building. House prices will fall until an equilibrium is reached with the costs of building new ones. With council tax set to rise sharply to meet the social costs of our new house buyers will have less to spend on housing itself. Hence I predict BTL owners will exit the market in droves and put the money to use elsewhere further accelerating the decline. So houseprices look set to fall 20%+ from the peak and will take at least 5 years to come back to 2007 prices. Time to cash in the chips as a BTL landlord

[Paul]

the credit crunch has only just begun . The banks in Europe see Barclays , hsbc , UBS have only been able to provide a limted insight into their problems. Now it's sub prime billions$$ next Mortgage defaults and the BIG one credit cards defaults that will come over the next year and that is Trillions. The market has not found a bottom for these financial stocks that are still worth bllions . THeir earnings and reporting will make them vunerable to take over from Soveriegn funds and not allow them to show profits for several years . thank you.

[Peter Middleton]

As it gos to the property crunch and house prices dropping estate agents closeing up and down the country,
We are in a recession in the building game this is my third One and the worst of them all, Im a Bricklayer by trade for 35 Years and Iv only work 3 weeks this years!Befor It was only aday out of work then back in work! House bulding come down 50% and I could see it comeing for a long time 2 / 3 years the house prices were way over priced' its going to get worst we got a long way to go 5/6 years befor it get better' This governmemt keep going on about bulding affordable houseing'To own a house here you need to supper rich to buy one from these greedy builders pushing up the prices' now there can lay back!And lay off all the construction workers and sit back for seval years now with there big fat profits they made over the years' this is going to have a knock on efect with out no dout' On Manufacturers shops New cars! Why is this county economy all ways run on the fill good factor with house prices going up?? Im fed up with it who ever in power they never can get it right Thacher Blair Brown' Then We go and vote Cameron inn he will not be any better He blame Labour Like Labour blame the torys when they 1st came to power??

[Alexander]

First: there is no shortage of houses in the UK as there are millions of empty homes in this country and soon they will be used...
Second: In the best areas (very few of them - 5%) prices will be stable and might even go up, but 95% will be going down as no super rich Russians, Indians, Chinese etc would buy there, let alone the British, Irish and Italians!
3. There are no reliable types of investments ever apart from cleverly bought property and land in the best areas.
Considering all this all your statistics and guesses with arguments have no value when discussing finances. Advice- buy property in Highgate (North London) or in Nice (South of France), and if you don't- why complain and talk nonsense afterwards!

[simon s]

The general tenor of this article is wishful thinking - you only have to look at the mass of negative data streaming out every week to realise that, even though circumstances are different now compared to the early 90´s, there is going to be at least as bad a crash, if not worse, than then. If you don´t believe this, look back next year at predictions being made now...and see how they have fared...

[Tony Cook]

If the Bank of England is correct and the credit crisis is nearing it's end then I would expect house prices to stabilise by Jan-Feb next year and possibly ease into a slight positive swing by end 2009.

However if not and if there were consequently to be a more major and general recession I would expect things to worsen substantially over a period of several years.

A lot depends on how Government handles the economy over the next few months, which of course given that GB is in office is no cause for optimism.

The one thing that you can be sure of is that the property market will recover eventually.

Perhaps the key to the whole immediate situation is the level of repossesions which continues to be pretty low.

If this continues I would expect the quantity of houses coming to market to fall while existing sellers who don't have any real need to sell will hold on to their present properties until they can sell them at a point which will enable them to achieve their desired object for wishing to sell.

In effect this should have a supportive effect on house prices.

As a case in point I have my house on the market presently as I wish to downsize and at the same time buy a house for my daughter.

If the market allows I will do just that but if not I'll happily stay put until it does. The one thing I won't do is panic.

I bought this house for £38,000 23 years ago so I'm pretty sure that I won't find myself in any negative equity situation.

Currently it is on offer at £183,000 which represents a 10% reduction on it's peak price. I will not drop below £180,000 regardless of short term swings.

If you are on the property ladder the best advice is to hang tight, if not then climb on at the bottom of the trough which will follow pretty smartly after mortgage funds become generally available.

[Dean Carr]

The reason for people accepting low offers is because that is the real value at this time, not because they are panicing. We have to realise the days of silly prices are over and all investors are out. The only people buying are real homeowners buying at real prices.

Tony you say you wont drop below £180000. The price of your property is probably already below that Which means you may have to wait 5 years to sell it. By then the price of the house you are buying will have increased too.

[Mark Aucamp]

Great Post. I found your articles especially useful and I will return as the content was excellent and yes I do believe that house prices are in free fall and a 25% drop can be expected - I am british mortgage Adviser

[BABZ ALLEN]

Not one to usually side with the readings from the instruments of superstition and imprecision that compose the quack science that is predictive economics; however, even Nostradamus would be right if we waited on his visions and gave him a flexible time window.

Which is to say, a market of restricted resource in an environment of finite capital MUST fall at some point, so why not now? And of your five major causative triggers, the first three affordability, mortgage and interest, are much more interconnected than the necessity of your paragraphing would allow.

Indeed, yes, current increases in inflation and mortgage costs are a lesser burden in value terms than in the 90's - however, when you look at the ratio burden of these factors on affordability of mortgages against income levels, the answer is by no means clear in absloute indexed or historical monetary values. Because house prices are double income values compared with 15 yeards ago, increases in mortgage rates, and inflation, need not be nearly so high in order to extract the same levels of hardship on struggling families.

Also, let's not forget that mortgages downpayments for threatened demographics these days are typically minimal, and savings rates for these groups are often low, so personally financed options for mortgage difficulties are less amenable for optioning in what is already a hibernating institiutional credit market.

[Denise]

Great! House prices become more sensible. People have less money to spend on rubbish. Everyone grows up and realises there is more than money in life and also we dont get those stupid house makeovers on TV.

[Alex]

When will people learn to SAVE before they SPEND? It will teach people watch their spending! No time for people with over stretched debt! Someone loss will make someone gain, it is a golden rule in money game!

[Glynn]

If statistics are to be believed, then all will be well according to the government. Only trouble is those stats are being churned out by the government! I for one will be maxing out my credit cards and overdraft and loans and live like a lord while I still can...then...bankruptcy. Hopefully the BOE will bail me out of my credit crunch like they have the banks.

[anon]

Here's to hoping that the recession (that is apparently commencing whilst we speak) will not get any worse - am a part qualified property lawyer, with another year of studying to go and at this rate I will have no job in another few weeks time...... Gordon Brown needs to introduce several measures to try and save the market - how about suspending stamp duty for twelve months, local authorities offering low interest mortgages, and getting rid of the fiasco that are HIPS (which were probably just designed to slow the housing market down anyhow)..... and, whilst I am thinking about it, where is all the affordable housing for key workers that the government had promised to us??

[Phil1]

Who owns shares in Bradford and Bingley, Alliance and Leicester or even M & S etc - where have they been going - yes down just like house prices.

For those who still have jobs is your firm still recruiting as it did last year or so? - if so you are lucky.

Even estate agents are shedding jobs and banks are not recruiting because its the economy and consumer confidence that are failing and falling - they will fall lower over the next year.

[rohit]

Why does everyone want house price to go up?
Lower house price are better for people who wants to live in theire houses.
So if the house prices fall by 30% it is gteate news for most people i.e thouse whoe want to buy ore move to bigger houes. Only bad news for money makker i.e house builders,estate agent and banks

[Helen]

Nobody has yet commented on that all-important factor: Human Nature! If I were a would-be first-time buyer at this time, my gut feeling would be to wait and see how much lower prices are going to go. I would not be willing to pay £150,000 for a property when there is a fair chance that next year it might have fallen to £120,000. And yes - we also have ghostly areas of empty new-build properties nearby. They mysteriously display "SOLD" signs for a few weeks, but are never occupied. One redevelopment has now become a funeral parlour.

[Lizzie]

Here's some empirical observations from this side of the Pond. Properties listed on the New York market for $1.2M (£600K) in May remain listed, now at 1.05, 995K. Such homes here were selling literally in hours last year, many in excess of asking. In April they sold at 97% of it. Now many asking prices have come down over 10%, and I have heard of several sales at 90% of that figure.

That is what, nearly 20% in two months! If you ignore properties over 3M (which most of us have to!) then any revival in prices vanishes.

Is New York very different to London? And does it count as a crash if it 'only' affects the bottom 90% of properties?

[Steve]

"Supply and demand..."

"It's different this time.."

The last-ditch delusionary quotes of those who have been swindled by the VIs and can't admit that this is simply a credit-driven speculative bubble like any other.

[Mike]

Cheap property -15%
Medium " -10%
Above one mil -35% (if owned by a former financier)

[Max]

Note from a Property Developer:

Well, I was lucky enough to cash in all my property in Jan this year.. netting a post tax seven figure sum.

I feel for those who are blindly hoping there will be a quick recovery. There wont be. Face it accept it. The banks lent stupid sums over the last 10 years to guys like me!- 125% mortgages!! .. you could buy a house with no deposit, have all legal fees added to the loan..AND have cash left over to develop the thing!.. then you just either sold it for profit...or re-mortgaged with a different lender at 95% on a better rate!!.. NO CASH needed!!..

I know people who did this over and over...going back for the same 125% ltv deal time and again!!.. it was childs play. They used the system like I did, to make massive profits!...Banks will NEVER offer that again!!.. a new era in banking has begun!!

My advice in a nutshell>
-If you own a house: SELL IT NOW!!
-If you are waiting to buy -WAIT.. at least until you see 3 consecutive months of house growth.

Property will come back..as does any real asset controlled by supply and demand.. but not this side of the London Olympics!

Wish you all well.. Im gonna travel the world in 2009, and see where the next opps are.. and will fill you all in

Peace

Max