How Long Do House Price Falls Last?

Post war data suggests that periods of house price falls can last for upto 4 years.

The last major housing bust in the UK was between:

• 1989 Q3 when house prices peaked at: £62,782
• and 1993 Q1 when house prices reached a low of £50,128
• UK Historical House prices

Why Do Housing Busts tend to last 4 years?

Overvaluation in boom periods. Features of the housing market tend to make house prices volatile. Inelastic supply, and over optimism can push up prices quickly.

Time Delays in Supply. When prices are rising in a boom, firms respond by trying to increase supply of houses. However, from start to completion there can be a delay of two years. At the height of the boom, firms start building new houses. When house prices start to fall, there is still a large increase in new homes coming onto the market. This lagged supply leads to prices falling even more. This is particularly a problem in the US, which  has a large excess supply. It is less of a problem in the UK where the boom in new house builds was limited by planning restrictions. For this reason the fall in US house prices is likely to last longer than the fall in UK house prices.

Mortgage Lending

In house price booms, mortgage lending tends to become more generous. Rising house prices make 100% mortgages seem more attractive. The recent US housing bubble was particularly characterised by lax lending criteria which encouraged more onto the property ladder. When house prices start to fall, the mortgage industry is hard hit. Rather than wanting to sell 100% mortgages, mortgage firms worry over negative equity and so ask for a much bigger deposit. In the UK, many mortgage lenders are charging a premium for any borrowers who have less than a 25% deposit. The result is that the number of people able to get a mortgage sharply falls. Thus the mortgage industry often reacts to market trends rather than encouraging stability.

Who Wants to Buy When Prices are falling?

If prices have fallen 15% and most economists predict another fall of 15%, what is the incentive to buy? There is a good reason to rent for 2 years and save you 15% on the price of a new house - not an inconsiderable sum.

Why Prices stop falling

Eventually prices fall to a level where buying houses is more attractive than renting. Houses become good value so people want to get into the market.

No Hard and Fast Rule.

Just because an OECD report found that house prices usually fall for 4 years, doesn’t mean that always has to be the case. Housing markets can vary tremendously throughout different areas. House prices in Japan fell for a whole decade before recovering. In other countries house prices may fall for  a short time.