Could we see another 1990s house price crash?

Could we see another 1990s house price crash? Up until very recently the overwhelming sentiment on this was no – the theory being that the 1990s slump was the product of a combination of events that wouldn’t be repeated.

The 1990s had over-inflated prices and overstretched borrowers, as we do today, but also had 15% interest rates, severe recession and massive unemployment.

On the flipside, a visitor from Mars to modern day Britain, says Anthony Hilton in the Evening Standard, would find: ‘an economy which employs more people than at any time in history, a stock of housing which has delivered unimagined wealth to the vast majority of home owners, interest rates which are low in comparison with those which have existed in 30 out of the past 35 years and a general level of prosperity which the population at large has never seen before.’

To all but the most bearish on property, this situation has for some time comfortably pointed to an ability to avoid absolute property doom on a 1990s scale.

But an interesting article I read in the Economist the other day has made me question this theory that I have, like many, held to be fairly true. The piece argued that, taking into account inflation, the current housing crisis in the US has the potential to be far worse than that seen during the Great Depression.

The Economist cited the S&P Case-Shiller national index, which has shown prices falling by 14.1% over the past year. This index only goes back 20 years, but its co-inventor Yale economist Robert Shiller, has compiled a version that goes back more than a century, showing the current drop ‘is already much bigger than the 10.5% drop in 1932, at the worst point of the Depression.’

And the author goes on to say that in the deflationary 1930s, general price falls meant that in real terms the decline in house prices was eased. Whereas current brisk inflation means ‘property prices have fallen 18% in real terms over the past year’. And this gives the potential for a larger cumulative price drop than the 26% real fall over the five years to 1933.

Now while the US may be in fairly poor shape at the moment economically, it hasn’t exactly hit Great Depression standards of living yet. In fact, for all its economic woes, the US – like Britain – has a pretty comfortable level of existence for the average citizen.

So, if under those circumstances the US can rival its Great Depression housing bust, why can’t the UK give the 1990s a run for its money?

The property figures that we are seeing released are delivering unrelentingly bad news – with the property market in the worst state it has been since records began for measures taken by Nationwide and the Royal Institution of Chartered Surveyors. Monthly price falls are rivalling those seen in the 1990s, with Halifax showing a 2.4% fall and Nationwide a 2.5% fall in May, and Halifax’s data showing the average price 8% off August’s peak.

That all sounds like pretty bad news to me, especially when you consider that the average home only fell by 13% in the 1990s slump from peak (May 1989: £70,246) to trough (Jul 1995; £60,965). Albeit with that 13% average drop masking the much larger amounts knocked off the value of some properties.

This is a topic that demands more investigation and we will be looking in more detail at how the current situation compares with the 1990s in the near future. The current crop of figures don’t make things look good and, unless banks pull out of their current anti-lending funk soon, they will continue.

In the meantime, the best hope of avoiding a 1990s repeat is that this very sharp shock caused by the sudden contraction of the credit market is also short and doesn’t lead to a hefty crash rather than a slowdown.

And all those who indulge in housing schadenfreude and claim they want to see price falls of 40% across the board should remember that would far outstrip the 1990s crash and the first part of that decade was a very miserable time that wrecked many lives.

- Simon Lambert, This is Money

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Comments

[Ray]

Property prices were overvalued by at least 30% and the last couple of years have been fueled by speculators and low interest rates.

My experience from the 90's is prices fall slowly because property prices are not easily realised. In other words in a poor market, it can take a year or more to sell a property, unlike shares for example which can take minutes. Therefore, sellers chase ping pong balls down the stairs. They ask a price, then realise the ball has dropped lower, then slowly drop the price only to find the market has already gone down to the next step. It is only when the they have hit the floor do they sell. The forced sellers do not have a choice and have to drop down the steps faster. Thankfully, at the moment there are not as many forced sellers as in the 90's, but watch the jobless figures in months to come.

It is not all doom and gloom, remember if you want to move up, you are likely to be better off with prices dropping. In the 90's we did not have as much unsecured debt and houses were more affordable, when taking disposable income into account. Watch this space and only buy if you are paying the 2010 price....your guess on this, may be closer than mine!

[richard, brighton. england.]

there are two reasons why property may crash;

1st over valuation,

we all know that property has reached unaffordable levels with more people overstating earnings just to get on the bottom rung, this has caused the market to reach levels which cannot continue and indeed when the "bubble" bursts it usually does so in style.

2nd confidence,

we have little confidence in government, inflation control (B of E) and future prospects. these three combined destroy the "feel good" factor something that, surprisingly enough, is the main reason folks take the plunge in the first place.

so lets ignore those who give a figure in percentage terms for how much the market will fall cause it's unknown territory and if i was looking to buy know i would hang on for a 50% cut.

[Digger]

All UK property cycles are very much the same.
This one, 1990,'82,'77, etc.
They all have similar graphical shapes.
They all have similar peaks and troughs.
They all occur for similar reasons.
It shouldn't be a surprise.

[Danny]

There are now an ever growing number of properties that have been recently re-valued, at 50% less than what they stood at a year ago. I was looking at a number of houes in Skipton recently, in North Yorkshire, presently priced at £180K. However, after searching through nethouseprices website, I discovered the sold prices of properties in that street were £50k-£69K in 2001!!!
When house prices have risen by {over} 200% over the course of the last 6-7 years, a 50% fall from their current massively inflated prices, is not a lot at all.
I personally wont touch anything until they return to 2001 prices and would urge other FTB's to do the same. Dont believe the Estate Agent Hype!!!

[Robin Pearce]

I had two of my buy to let flats valued recently for the purposes of drawing down more money as deposits for more buy to let flats. The surveyers valued them at 10k to 15k less than they would have sold for last year. The price of property is not only dependant on the mortgage supply but also very much dependant on how much a purchaser can borrow. This is limited by the valuation put on a property by surveyors. I blame surveyors to large extent for the fall in property prices. They get twitchy so they down value property. That sends prices lower so they get more twitchy & value yet lower still. A vicious circle driven by mass psychology. A self fulfilling prophesy. A downward spiral driven largely by rather silly surveyors.
Robin Pearce, Southampton

[Ian, Berkshire, UK]

I believe most of the falls in property prices are down to our traditional estate agents trying to force a sale where financing for mortgages has been squeezed very hard by the banking system. They need to book sales as their commission is on completion of a house sale. We are in a situation where we bought in 1999 where borrowing rates are pretty similar to now (6%) and a 10% deposit was also expected. The deposit worked out at 60% of my annual income at the time - which was high. Now it is about 79% for our current valuation and my current annual salary. There really isn't much difference I think easy credit and low interest rates has altered potential buyers expectations for the future.

The media isn't helping in this doom mongering because it has the effect of stopping potential properties coming to market. If properties don't come to the market estate agents aggressively talk sellers into dramatically dropping their prices. You need to be careful here if you're thinking of selling to rent because your estate agent will negotiate your price down by -15% from last year, add your moving fees takes you down to say -20%, rental prices have ballooned with this extra demand for rental properties you may find you've lost -20% already and your rent will cost more than your mortgage. Now you're waiting for property to crash to what? To make it worthwhile selling say a 3 bed and upgrade to a 4 bed from your previous property you need to account for your moving fees again for the purchase, then add the overheads of renting you will need property prices to drop probably over -30%.

With respect to interest rates the US Federal Reserve have aggressively cut rates, ECB slight increase, BoE on hold. The credit crunch will eventually create a deflationary spiral as a result of the current rampant inflation and loss of disposable income combined with available credit from the banking system. On top of that the UK has an election pretty soon, the current Labour government is dead in the water they have very little sweetners left in the political cupboard to tempt their most hardy of core voters. To cut to the chase their only trump card to save their party from a generation in the political wilderness is to put the BoE under immense pressure to cut rates (they can't cut taxes they cannot afford this). They cut rates the property markets and sentiment will change quite dramatically.

If you need to sell then think about renting and wait to see how the market develops, rental rates are increasing at an alarming pace due to the fear that has developed in the housing market. We have a situation of many players waiting on the sidelines to jump in if the property market crashes. The housing shortage in the UK is so high there will always be a demand for property. To put all of this in perspective a family home in 1970 cost £7900, then we had the largest property downturn in the UK in the 1970s, the house sold for £265000 in the early to mid 1980s. You can't beat property as a home and as an appreciating asset. The bottom line is don't hold out too much for that property crash as most homes are fully paid or are owned by those on very small mortgages.

[Ian, Berkshire, UK]

In my last paragraph there is an error in this sentence:

"If you need to sell then think about renting and wait to see how the market develops, rental rates are increasing at an alarming pace due to the fear that has developed in the housing market."

It should read:

If you need to sell then think about renting out your property and wait to see how the market develops, rental rates are increasing at an alarming pace due to the fear that has developed in the housing market.

[peter]

You are a bit slow on the uptake - if this is not a 90s crash I am a pink elephant.

[Mike]

properties not coming to market?
rental rates increasing?
housing shortage?
rate cuts?

It's an interesting dream, but low on reality:
- number of properties on the market is much higher than a year ago (in the SE), but many are going for sale and rent at the same time.
- I's now far cheaper to rent than buy in many affluent parts of the SE. Homes not being sold are swelling the numbers available for rent.
- There is no housing shortage - check the number of people living homeless, check the number of empty 2nd homes and empty properties, check the number of migrant workers heading elsewhere as the UK economy falters
- Rate cut? no, in defence of currency and to control inflation it will have to remain flat or more likely rise. Otherwise if the £ falls against the dollar, or further agains the Euro all our imports (oil,food, clothes, electronics goods, cars....) will rise even further in cost - that is the inflation reality we now face after allowing our borrowing - personal and national - to get out of hand.

The boom was very large, but nothing is forever, and the bust has only just started - it's not 'doom and gloom', but economic cycles....

[R wheeler]

I used to live in s croydon until april 2007. I sold at the top of the market and am now renting a property in s devon waiting for prices to drop. I predict that the market will fall a lot further over the next three years, possible by as much as 50%.
In 1988 my previous house in croydon was valued at £23000.00. Four years later it was valued at £107000.00, now you know why i am sitting and waiting!

[peter]

We will, if you all are patient and wait unti we see fall to its lowest 50%