In recent memory we have had two housing boom and busts. There are many similarities, but, also quite a few differences.
Differences in Housing Crashes:
1. Length of Time
The housing bust of 1990 lasted for nearly five years. By contrast, 2009 saw an unexpected rise in prices bringing an end to falling house prices after only two years. Some suggest this rebound in prices is premature and house prices will resume a downward fall in 2010. Nevertheless it is quite a significant rebound in prices (even based on very thin trading volumes, which might be distorting prices) If the current crash follows the last one, we might expect another two years of falling prices.
2. Interest Rates.
The huge difference between the two housing busts is the level of interest rates. The 1990 bust was caused primarily because of the very high levels of interest rates (reaching 15% at their peak). This made mortgages very expensive causing record levels of mortgage default. By contrast, the current bust is against a backdrop of 0.5% interest rates. The low interest rates mean that mortgage defaults have been lower than last time. Less people have been having difficult with payments.
One consequence of this is that payment problems may merely delayed until later in the cycle when interest rates rise.
Housing Payments
Source: Financial report on British Households 2009 by NMG. pdf
This shows a much lower level of households are experiencing problems with housing payments than in 1991.
3. Credit Crunch
The current crash has led to a sharp reduction in the volume and number of mortgages available.
4. Depth of Recession
The current recession is much deeper than the 1991-92 recession. Currently, GDP has fallen by 6% and lasted six consecutive quarters, which is a sharper and more long lasting fall than in 1991. However, despite the deeper recession, the housing crash (so far) has not been as sharp as in 1991. This suggests levels of interest rates are more important than economic growth in influencing nature of housing market.
5. Affordability
At the end of the crash in 1995 the ratio of house prices to earnings for FTB fell to just over 2.1. By contrast, the ratio of house prices to earnings for FTB is still over 4.0. Suggesting house prices are still overvalued.
The big question is whether 2009, really is the end of the housing crash or whether it is just a temporary pause before higher unemployment push prices much lower.
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