Experiences of the last housing market crash?

Alan_M_2

EdInvestor wrote:

It was the very high interest rates that caused the last crash,fundamentally.Shocking economic management first by Nigel Lawson and then Norman Lamont, when the pound was kicked out of the ERM.

Interest rates at that time were set by the Government and thus could be manipulated by political realities.Now they aren't - they're set by the BoE according to principles related to the health of the economy such as promoting low inflation.Hence no crash, as it would be bad for the economy as a whole.

I do agree that other structural changes, such as the rise of BTL and the growth of two income families have also underpinned prices.

Lenders are also now much more experienced in dealing with downturns: much higher deposits are demanded of FTBs, so as to avoid negative equity, which is not only a problem for the individual (and the bank) but tended last time to cause a downward spiral which affected the whole market for years. If problems do arise, more creative ways to solve them are now used rather than immediately resorting to repossession.It's a much more sophisticated market, things like mortgage securitisation have removed much of lenders' risk.

An example of how much things have changed is the growing tendency to pay off mortgages earlier.Back in the 70s and 80s you would have been regarded as a complete fool if you did that: why bother when inflation was reducing the value of the debt every year on your behalf automatically?


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I agree with most of your comments here except the Deposit issue.

There are plenty of 100% mortgages available and in fact up to 125% is available via Northern Rock for those in debt and with no deposit to get into property.

I personally think lending of this nature is reckless.

Another minor point is that interest rates actually went through the roof in 1992, which is quite some time after the property bubble had burst, prices were already on the slide from late '89 to early 90's. So stating interest rates caused the drop is actually incorrect, what they did do was stick the knife in once the crash had occured.

If you want to pin it on something particular, inflation was running rampant during this period and the high interest rates were actually a result of inflation and nothing specifically to do with housing values.

We now stand a greater chance of hyper inflation to correct salaries than we do massive hikes in interest rates, unfortunately the two tend to be irrevocably connected.

Alan_M_2

suffolkb wrote:

We bought a 2 bed maisonette in Kingston for £66,000 in 1987. Then we had 3 kids in 2 years and needed more space,so put it on the market in 1993. The agent said that if we`d sold it the year before, he`d have suggested £92,000, but now £83,000 was more realistic. We then had to keep dropping the price until it finally went for £63,000. But, we bought a 3 bed house for £73,000 that would probably have been over £100,000 in the peak, so we didn`t really lose out.

This is a very good example of how the crash can actually be almost irrelevant as your new destination property is effected in the same way.

The only real losers are people like me that bought within the 18 month period immediately before the correction (and were stretching to buy at that point). Bad luck or short sightedness...you decide.

Anyone now sat in property or who bought anything over a year ago is realistically fine as long as you're viewing your property as a home and not an ATM.

I question peoples judgement buying right now at what could very easily be the peak of a market and getting leveraged to the eyeballs banking on further capital increases and income rises, This isn't investment it's speculation and reckless when it's with your home.

meanmachine_2

EdInvestor wrote:

Lenders are also now much more experienced in dealing with downturns: much higher deposits are demanded of FTBs, so as to avoid negative equity, -

I'll have some of whatever you're smoking, fantasy boy.

I love this argument that banks are now so much more "sophisticated".


They'll quickly lose that sophistication when bad debts really start to bite and shareholders start demanding their heads on plates.

Banks are benign during the good times and vicious during the bad. That's how they make money.

mystic_trev

Got to agree with above. If Banks are so "sophisticated" why are they providing 110% mortgages?

BobProperty

Two points. Edinvestor oversimplified it by saying interest rates caused the last property crash, rates reached their highest long after the peak in prices IIRC. The economic problems, again IMHO, were more to do with the government pumping money into the system by printing Gilts in the late 80s then getting caught out over their exchange policy. Oh and guess what so called prudent Brown is doing now? He's printing money at about +13% but has stopped publishing the figures in the hope that not too many people notice.
Second point which will cause big problems for anyone getting into debt trouble. Back in 1990 you got your mortgage interest paid about 2-4 weeks after you went on benefit. Note that, all your mortgage interest. The rules were changed and revised several times over the following few years until we have the current system. Which is the interest, at a standard government defined rate, on up to £100k after 9 months on benefit. Beyond that 0, zilch, zip. Now there weren't too many people with £100k mortgages who were on the dole in 1990 but this time round?

meanmachine_2

They're so sophisticated they'll lend anyone ANYTHING without checking their earnings.

Oh my, yes very sophisticated, what what.

Some people live in la-la land.

I'd love to be a resident. sadly I live in the real world where banks are aggressively lending to anyone to scrape market share, selling these mortgages on to the poor old pensions market, and chasing each other to the bottom in terms of who they'll lend to.

Yes, we really have learnt a lot from the last bubble.

We've learnt how to make it three times the original size.

movieman

Yes, we really have learnt a lot from the last bubble.
We've learnt how to make it three times the original size.

Indeed: this bubble makes the last one look like a minor blip. The economic effects will be with us for a generation or more.

cwcw

Alan_M wrote:

Another minor point is that interest rates actually went through the roof in 1992, which is quite some time after the property bubble had burst, prices were already on the slide from late '89 to early 90's. So stating interest rates caused the drop is actually incorrect, what they did do was stick the knife in once the crash had occured.

No they didn't. Interest rates (base) went from 8% in April 1988 up to 13% in November 1988. October 1989 saw the peak of 15%, from which they crept back down to 14% in October 1990, with gradual 0.5% decreases until they reached 10% in May 1992. By November 1992, the base rate was down to 7%.

The 5% rise in rates in a 7 month period in 1988 almost certainly triggered the crash. It is an increase of 63%. If interest rates hit 8.15% in June this year then we would have an equivalent situation. However, I don't think even posters on HPC could believe this would happen.

movieman

If I remember correctly, UK interest rates bottomed at 3.5% in this cycle. A 63% rise from there would be 5.7%, and we'll probably see rates higher than that this year with more to come...

1sue23

Yes I remenber it well worst time of my life.Had committed to buy property on a long completion ,so had 10 months to sell existing property housing market good at this time ,but then it happened interest rates up nobody buying and commited to second property,had to bridge total commitment £228000 income £24000 nightmare worked for building society at time sackable offence arrears .12 months to sell 1st house had to drop price by £65000 to sell ,have never completley recovered the lost money never again.