January 12, 2009
House Price Crash? How Does 2008 Compare with the 90s?
House price crash? How does 2008 compare with the 90s?
Is the UK housing market is on the brink of a serious downturn? As availability of (and demand for) mortgages falls, house prices are falling too - which could spell bad news for homeowners looking to sell.
Whenever the economy shows signs of danger, we can look at historical examples to predict what might occur. The last slump in the housing market occurred in the late 80s / early 90s - but there are a few differences in today’s economy that suggest the current housing slump may well take a different course.
How do the early 90s and 2008 compare?
ECONOMIC CONDITIONS
1990s
Along with the 1980s boom in house prices, inflation rocketed. To combat the rise in inflation, the Bank of England felt it necessary to raise their base rate significantly, at one point reaching almost 15%. This meant that many people could not afford a mortgage - meaning demand and subsequently prices fell sharply as the 90s began.
Today
Following years of relaxed lending, increasing numbers of sub-prime homeowners began to default on mortgage payments. This became known as the ’sub-prime mortgage crisis’.
To limit any possible damage, banks tightened their lending criteria, making it harder to qualify for mortgages. Mortgages also became more expensive, so demand for mortgages is now very low, and house prices have started to fall.
INTEREST RATES
1990s
Throughout most of the 80s, the Bank of England’s base rate was around 10% - twice as high as today’s. However, most mortgages were smaller (as multiples of salaries) than they are today, so they were still affordable - until the base rate jumped to almost 15%.
Today
For the past few years, the base rate has hovered between 4% and 6%, making mortgages more affordable. This encouraged many people to take larger mortgages, often using up a great deal of their monthly income - which meant any drop in income or increase in expenditure (caused by a rise in interest rates, for example) could push them beyond their financial limits.
Remember: in the 90s, the Bank of England intentionally raised its base rate to counteract inflation, but this also made mortgages more expensive. In 2008, however, the base rate has in fact been lowered, to encourage lower interest rates from lenders. However, while uncertainty in the market continues, lenders are unlikely to lower their rates accordingly.
SIZE OF THE ‘BOOM’
1990s
The 90s downturn was preceded by an average real house price* rise of around 75% - from around £65,000 in 1982 to around £115,000 in 1989.
This was followed by a decrease to just over £70,000 at the end of 1995 - around a 40% drop.
Today
The more recent house price boom lasted a lot longer. House prices rose consistently from 1996 to mid-2007 - and in that time, real prices went up from around £73,000 to around £188,000: a 150% increase.