How Bubbles Burst – 7 Lessons from Past House Price Falls

A look at previous periods of falling house prices. What caused them and whether we are facing similar or different situation now.

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In 2009 Irish house prices collapsed falling 55% it was a tumultuous end to a housing bubble that spectacularly burst it was a similar story around the world in places like Florida and California prices also fell 50% a decade of overoptimism Reckless lending and a bubble sentiment caused prices to sore

Only to vent spectacularly fall it wasn’t supposed to happen but the house price fall was so Steep and default so rampant it led to a Global Credit crunch with banks around the world running out of cash UK house price inflation went from 25% to minus 16% it was a moment of

Reckoning but what have we learned since that crash are there any similarities or is this time different there are seven lessons that we can learn from past house price history which is relevant to today but first I’d like to go back to the 1970s it was a very different

Country 300,000 coal miners black and white TV depressed inner cities and a sense the country was losing its way but in the early 1970s house prices were SAR but then in 1973 and 74 the oil price shock caused rampant inflation a surge in interest rates and a deep recession

In fact it all sounds quite familiar with interest rates rising to 15% and the economy going into recession what happened to house prices you might expect that to be a recipe for falling prices but nominal prices didn’t fall they continued to rise and it was the

Same story in the early 1980s when we had 3 million unemployed even higher interest rates of 17% and again a deep recession but this time again house prices didn’t fall now that is somewhat misleading because if you have inflation of 10 20% it becomes even more important to adjust house prices for inflation

Real house prices did fall 20% in 1975 and again in the early 1980s but it was not a classic housing crash Why did interest rates of 15 to 177% not cause prices to fall one reason is that in the 1970s and 1980s house prices remained quite affordable in

2022 house price to income ratios reached a record level of nine times in the 1970s it was closer to three that’s a huge difference between then and now in the 1980s the economy started to changeed rapidly de-industrialization the growth of financial services and the first stages of financial deregulation

Which allowed Banks to lend bigger mortgages in the late 1980s the economy boomed for the first time in the postwar period the UK seemed to be outperforming its International competitors with growth of around 4 to 5% a year and it was an economic boom that particularly benefited the middle and home owning

Classes especially in the south of England a wash with higher wages and a new found confidence house prices soared especially in London and the southeast at one point house price inflation reached for dizzying Heights of 35% Mrs fer had promised a home-owning revolution as Council houses were sold

Off and with house prices rising over 30% a year who wouldn’t want to get on the property ladder but the Lawson boom had a dark secret wildly optimistic claims of an economic Miracle Were Far From Reality the UK was living beyond its means the high growth was causing a

Rise in inflation and a trade deficit the growth was unsustainable inflation was becoming a real problem belatedly the chancelor started to increase interest rates at first the economy just Shrugged off for higher interest rates it took 2 years from the time interest rates were first increased for house

Prices to start to fall and That’s a classic example of how higher interest rates can have significant time delays in 1990 the UK joined the exchange rate mechanism fer was unconvinced but Lawson hoped it would help reduce inflation the problem was that the weakness of the UK

Economy caused the value of a pound to fall and the government were forced to increase interest rates to 15% it was a disaster for home buyers who had taken out big mortgages at interest rates half that level the combination of very high interest rates and falling house prices

Caused the economic bubble to pop the UK economy lurched into recession unemployment Rose close to 3 million and thousands of homeowners found they couldn’t afford mortgage payments areas and repossessions soared it caused an AB Brook change in the housing market prices fell and homeowners were left with negative

Equity in 1992 the UK left the irm and interest rates were able to start to fall quite quickly the economy recovered but the housing market was very slow to recover too many people had got burned by high interest rates and falling prices even as the economy recovered

House prices stagnated it was not until six or seven years later that house prices started their upward Trend in the90s Crash nominal prices fell 20% and real prices 35% and the house price income ratio had almost halfed from 5 to around 2.8 it was a big shock but few who

Bought houses in the mid 1990s could have predicted how much their house price would increase over the next three decades in the early 2000s house price to income ratios Rose to levels even greater than the 1980s boom it was held by a strong economy relatively low interest rates and the deregulation of

The mortgage Market which saw a growth in subprime Lending with fewer checks and affordability the traditional model of a mortgage was that the building society would lend out its own Savings in mortgages but in the 2000s Banks could be more profitable by borrowing on short-term money markets to lend out

More profitable long-term mortgages the result was an increase in mortgage Supply I personally benefited getting a self-certification mortgage in 2005 house pric to income levels s to record levels but again we were that this time is different with a shortage of Supply surely prices won’t fall but in 2006 High inflation caused interest

Rates to increase and a sharp rise in mortgage payments as a share of disposable income and when the Global Credit crunch hit with an unexpected ferocity the likes of Northern Rock and braford and Bingley couldn’t borrow any more and were facing insolvency and only government intervention prevented their

Collapse mortgage lending dried up and the delayed impact of higher interest interest rates caused prices to fall 20% within a short time prices might have fallen much further except for two factors firstly interest rates were cut quite dramatically to 0.5% and secondly the UK had never had a

Boom in building houses in the 2000s countries like Spain and uh Portugal Ireland and Florida had also seen not just a boom in prices but also a boom in home building when the crisis hit in 2009 there were thousands of newly built houses that couldn’t be sold this excess

Supply caused a big drop in prices this is why prices fell 50% in Ireland but only 20% in the UK and if we look towards uh 2023 whatever you think of the UK housing market we can all agree that there’s no excess supply of housing there’s been no boom in home building in

Fact recently home builders have been cutting back because of the adverse market conditions and so this shortage of prices will limit price Falls but importantly not prevent them now on the one hand there are significant differences with the period leading up to the financial crisis mortgage lending is better regulated for more stress

Tests than pre- financial crisis many homeowners are better capitalized than in the past areas are currently nowhere near level seen in say the early 1990s banks have not been lending mortgages on a pony style scheme like in the past however one thing about economics and the housing market is that we often look

At the problems of The Last Problem the last recession the last crash in 2023 there are different types of financial concerns years of stagnant wages a cost of living crisis have pushed many households closer to the edge as interest rates increasingly bite next year more will struggle to meet the cost

Of mortgage repay payments and although interest rates at 5% look much lower than the 1990s and 1970s it’s a very different scenario because house prices are now so much more expensive as homeowners see their effective mortgage rate double when they remortgage it could cause an increase in mortgage

Payments of around £500 a month it’s a real economic shock so what do the lessons of the past teaches about the present day here are seven takeaways firstly the UK has never had a dramatic collapse in prices like you see in Florida or irand partly because we’ve

Always had a relative shortage of Supply secondly the housing market is surprisingly volatile with big fluctuations in house price to income ratios thirdly the market is often quite slow to react to significant changes in interest rates the rises in the late 1980s were still been felt several years

Later fourthly despite a shortage of housing this doesn’t mean prices can’t fall in the short term prices are really affected by changes in demand which can swing dramatically fifthly although real house prices in the UK have already fallen by 20% history would suggest there still more correction to come

House price to income ratios are still very high by historical levels sixthly a big factor detering the housing market in 2024 will be the state of the economy the last two big Falls in house prices in 1991 and 200 9 both occurred during a deep recession and Rising unemployment

Currently Bank of England forecasts for Rising unemployment are fairly modest the banks still predict will avoid recession but if the impact of higher debt falling real wages and higher interest rates hit spending and growth next year as many fear then unemployment could rise more than expected and this

Will definitely change the Dynamics of the housing market seventhly the past can give some guidel lines to what might happen in the future but there’s always a different issue what was a big issue in the ’90s was interest rates of 15% in 20089 it was a Global Credit Crunch and

Shortage of mortgage financing in 2024 it may be something different such as uh falling real wages a big question is how overvalued are UK house prices and this depends on which way you look at it if you look at it compared to renting they’re not too overvalued but comp

Compared to house priced incomes they are this video goes into more detail about how overvalued UK house prices are and how much prices may fall