Readers Question: How can i compare and contrast the current UK Housing market with that of the 1990s. What are the key drivers for the markets and the outlook for prices?
The 1990s saw the end of a housing bubble and a serious house price crash in the year 1992.
Leading upto the housing market crash of 1992, there was a period of economic boom, and corresponding boom in house prices (especially in London and South East)
The difference in the late 80s and early 90s was that the Economy experience a real inflationary boom. Economic growth reached over 5%, but, at this rate the growth caused inflation to rise to 10%. Therefore, the government felt compelled to start reducing inflation.
They felt the best way to reduce inflation was to join the ERM (exchange rate Mechanism). To cut a long story short, the inflation of 10% and membership of the ERM required interest rates to rise very high to 15%. At 15% mortgages became incredibly expensive and so there was a record rise in defaults and home repossessions. People stopped buying and house prices fell by 15% (More in London and South East).
Eventually the UK left the ERM, but the damage was already done.
Since that period interest rates have been much lower and much more stable. Monetary policy was given to the Bank of England MPC. They have enabled low inflationary growth, which enables low interest rates.
Low interest rates and economic fundamentals (demand greater than supply) mean that house prices have risen beyond all expectations (upto 300% increases since 1992.)
E.g. A property located in UK which was valued at £200,000 in Q1 of 1992, would be worth approximately £705663 in Q3 of 2007.
Now many suggest that house prices are overvalued and are likely to fall – see house prices set to fall.
However, there is a difference. Because inflation in the UK is low, the MPC are able to cut interest rates (rather than increase them to 15%) Therefore, I don’t feel there will be a crash in house prices. 2008 will see mortgage payments become more affordable (and not less affordable) . Some buy to let investors may take the opportunity to leave the market. But, basic supply constraints remain. Therefore, I believe house prices may stagnate of fall by 2-3% but I see no reason for a collapse in house prices.
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Macroeconomics factors will have an impact on affordability, but the greatest impact on house prices is CONFIDENCE in the property market.
The widespread belief that ‘the only way is up’ is simply no longer there, unless of course if one is prepared to stick with a property long term…. which is not the case for 1st time buyers, EU immigrants, and young families who tend to have a short-medium term view because they want to move up the ladder.
“Rent is money down the drain” – heard that 1million times…. however, it is now much cheaper to rent a property than to buy it with an interest only mortgage, which is still money down the drain… I know many young couples in very well paid jobs & lots in savings than rent because it’s the cheaper & worry free way to have use of a suitable property. Also, let’s not forget that many of the EU economic immigrants that are supposed to keep the UK economy strong and maintain property demand high come from countries where owning a property is not a ‘must have’ – most of them do not buy into the they are British obsession of being a property owner at all costs. I’m one of them.
Property market will go down at least 5% next year.
Hi Frank,
Thanks for comment, I think you make quite a few valid points.
However, the continuing shortage of supply, will be important factor.
“At 15% mortgages became incredibly expensive and so there was a record rise in defaults and home repossessions.”
No.
Interest rates were at 15% for a matter of hours.
I remember…I was teaching Economics at Cherwell tutors at the time.