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Why did the last house price crash happen?
fimonkey
Posts: 1,238 Forumite
As someone who knows not-a-thing about economics, can someone please explain to me why the crash of 1989 happened in housing market? I remember my sister rushing in to buy a house, to the extent she was there the second the estate agent valued the house and made a deal there and then. This was in 1990 and she paid 32K. Within 6 months the house was only worth 24K.
I was merely a youngster back then and didn't understand any of it. What was going in in terms of:
Employment/unemploymet.
Interest rates (I know they rose rapidly, why was this)?
Stock market (was there a crash there too)?
Inflation
Anything else that was significant back then (national debt? Threat of gulf war? etc etc)
Very grateful to all answers.
Fi
I was merely a youngster back then and didn't understand any of it. What was going in in terms of:
Employment/unemploymet.
Interest rates (I know they rose rapidly, why was this)?
Stock market (was there a crash there too)?
Inflation
Anything else that was significant back then (national debt? Threat of gulf war? etc etc)
Very grateful to all answers.
Fi
0
Comments
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Hello Fimonkey
Yes it did have a lot to do with interest rates and the UK coming out of the ERM but I always think it is to to with affordability. Take a look at the graph
http://www.in2perspective.com/nr/stats/house-price-to-earnings-ratio.jsp
You will see 3 large peaks and 2 troughs . What do you think is going to happen next remembering the current peak is much HIGHER than the other two
People will try to tell you that interest rates are 50% lower than in the 90's when I paid 15% but remember house are 300% higher than back then.
I always say this , would you rather have
1) A 50k house back in the 1990's at 15% interest
or
2) A 150K house at 6%
It doesn't need any calculation you would take number 1 every time.
This market is overvalued and prices will come down0 -
Hmm cheers, ... I'm not at all qualified to get into the debate about what will happen this time (though i read others opinions with interest). I would love to know what the analysis of the last house proce crash is/was though (as looking at the past is always 20/20 vision)0
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I believe there was some sort of slow down in the economy that caused a large number of people to lose their jobs. This meant that people could no longer afford their mortgages, so tried to sell their houses, which caused a large up in the properties available to buy, hence dampening prices.0
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My belief is also that its economics that turn the market but then it's sentiment that takes over and controls how far they drop.
When prices are rising £1k per month, people think "I don't want to miss the boat". When prices are falling, people think "I'll hang on and see how far they fall"0 -
I was an Estate Agent in 1990 (still am). The Chancellor had caused a big increase in house prices in 1989 because back in those days you could claim tax relief on the first £30K of your mortgage. If people weren't married they could claim double the tax relief, which greatly reduced their mortgage payments. When he abolished the double tax relief, instead of doing it straight away he gave people from the time of the Budget in March until August before it was changed. Consequently, anyone who had been thinking of buying within the next year or two all decided to do it before August and there was a mad rush of buyers. In this area, prices nearly doubled in 5 months as there weren't enough properties to meed the demand.
The problem was that the rest of the economy couldn't sustain this massive increase in house prices, interest rates were around 15% and after it all quietened down in 1990 there was a big slump. All the people who had wanted to buy had done so and the market was left with a load of overpriced houses that nobody could afford to buy without the double tax relief.
I was made redundant, my husband who works in construction was laid off, so all in all a bad time was had by all. The prices did come down by quite a bit and the market gradually revived over the years thanks to lower interest rates. History lesson over.........0 -
This may be very boring so just skip past this if you aren't interested.
In the 1986 and 1987, Nigel Lawson (the Conservative Chancellor) cut income taxes in his budgets. Just before the General Election was called in 1987, he also cut interest rates
This, combined with a relaxation of lending rules for banks and especially building societies, led to a credit boom (where banks create money by lending to their customers). House prices had been rising fairly rapidly since the fall in real prices in 1982 and this was then fuelled by this credit boom. Then in the 1988 budget, Lawson announced he was going to abolish MIRAS (Mortgage Interest Relief At Source) which allowed mortgage interest payments to be paid with tax free income.
This fuelled a belief that one had to get on the property ladder now or never be able to afford it. House prices leapt.
Unfortunately, real inflation (of goods and services, not just assets) started to rise rapidly at this point. In an attempt to slay the dragon of inflation, Lawson sensibly increased interest rates. Rather less sensibly, he also instructed the Bank of England to hold the value of sterling level with the Deutschemark rather than let the pound rise as one would expect as interest rates rose. This meant that the prices of imported goods were higher than they would have been if the pound had been allowed to rise so meant that interest rates had to be held higher, longer than anyone expected.
People lost their jobs as businesses folded under the strain of increased debt repayments. Small business overdrafts were called in as banks became more risk averse causing a liquidity crunch for many, leading to more people losing their jobs. Banks wouldn't (and indeed couldn't) lend as much to people to buy houses. House prices fell at the very time that distressed sellers needed to sell - by the mid-90s, over a million were thought to be in negative equity (house worth less than the borrowing secured against it).
The worst hit were people in 1 bed flats in grubby parts of London that found that their property was effectively unsaleable at any price the bank would allow them to sell it for. TV programs were full of people trying to bring up twins in tiny flats in Streatham that were worth, say, £30k vs. a mortgage of £60k.0 -
What would be the point of rushing to buy before the end of double tax relief, at best you would get 5 months tax relief? Hardly enough to justify paying double for a house, I should think.smreynard wrote:I was an Estate Agent in 1990 (still am). The Chancellor had caused a big increase in house prices in 1989 because back in those days you could claim tax relief on the first £30K of your mortgage. If people weren't married they could claim double the tax relief, which greatly reduced their mortgage payments. When he abolished the double tax relief, instead of doing it straight away he gave people from the time of the Budget in March until August before it was changed. Consequently, anyone who had been thinking of buying within the next year or two all decided to do it before August and there was a mad rush of buyers. In this area, prices nearly doubled in 5 months as there weren't enough properties to meed the demand."Mrs. Pench, you've won the car contest, would you like a triumph spitfire or 3000 in cash?" He smiled.
Mrs. Pench took the money. "What will you do with it all? Not that it's any of my business," he giggled.
"I think I'll become an alcoholic," said Betty.0 -
Guy_Montag wrote:What would be the point of rushing to buy before the end of double tax relief, at best you would get 5 months tax relief? Hardly enough to justify paying double for a house, I should think.
Herd menatality....it was madness! I was 23 at the time and house prices (before the crash) were going up by thousands of pounds a week! I bouhg tm yfirst hoome in Warboys (Cambs) in Sept 1986 for £34,650 By the time it was completed in Feb 1987 others were selling for £47,000!
People were rushing to buy houses and I remember news stories of people queuing outside building plots to buy houses the day they were released (ie: the builder set the price) Just before the crash, my house was valued at £95,000!!!
The herd got carried away...it's inexplicable, but that's what happened.
MIRAS was phased out gradually anyway so it wasn't as though you got hit hard straight away.
it was a very difficult time though but I managed to hold on to my home...it took me until 1996 when I eventually sold the house for £42,000!!! to pay the building Society back all of the agreed arrears dating back to the early 1990's and the crash!
Dpon't EVER want to go there again! Dark and scary time in my life!The only thing to do with good advice is to pass it on. It is never of any use to oneself. (Oscar Wilde);)0 -
Guy_Montag wrote:What would be the point of rushing to buy before the end of double tax relief, at best you would get 5 months tax relief? Hardly enough to justify paying double for a house, I should think.
It exascerbated a belief that if you didn't get on the housing ladder today, you'd never be able to. I am something of a student of bubbles (everyone needs a hobby) and this is a classic sign of one.0 -
OOh, can you suggest a reading list (no, I am serious, really)Generali wrote:I am something of a student of bubbles (everyone needs a hobby) and this is a classic sign of one.
Do you look at the UK market or other historical economic bubbles from around the globe?0
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