Why did the last house price crash happen?

fimonkey

This is all interesting (and educational) stuff. I'm considering an evening class (GCSE) in economics, would they cover this kind of stuff in this subject? (I am a pure scientist by nature so it's all really new to me).

I'm purely interested in the reasons for the late 80's crash (as opposed to using them to make predictions about todays market) From what I've read on this site, today's economics are no -where near the economics of the late 80's (other than a rise in interest rates). Am I right? or are there other similarities happening between now and the 80's?

Cheers all

Voyager2002

fimonkey wrote:

I'm purely interested in the reasons for the late 80's crash (as opposed to using them to make predictions about todays market) From what I've read on this site, today's economics are no -where near the economics of the late 80's (other than a rise in interest rates). Am I right? or are there other similarities happening between now and the 80's?

The main similarity is that houses are no longer affordable; that people buy them for the sake of making a capital gain. However, interest rates are far lower now than they were then, and there had been a very steep increase after a period of very low interest rates.

Generali

Most of that would be covered by A level certainly, they didn't have GCSEs when I was at school so I don't know what that covers!

The economics of today feel a lot different from the 1980s - there are sophisticated financial instruments (CDOs for example) to spread risk and clever central bankers to prevent any nasty recurrence of inflation - but scratch beneath the surface and I think little has changed since the 80s beyond increasing trade flows.

The US and UK are both still running massive trade deficits, Japan and Germany (and now China) run big surpluses. Inflation is on the rise. Most of the country north of Watford (apart from Aberdeen) and West of Offa's Dyke rely on massive tax outflows from London to pay their way. Most people want to be rich without putting the work in to get there. It's the last one that causes bubbles to start, IMHO.

fimonkey

So a CDO is a loan that could potentially be used to stop ppl going bust? (And these didn't exist in the 80's)? Also, I hear it's now much easier to declare bankruptcy, or sort out an ?IVO (sorry can't remember the name of them, voluntary debt repayment things) so these will make it less likely for ppl to loose their homes and face repossession then? In that case I do see the whole picture regarding the 'Bubble' but my own thoughts are that this particular bubble (todays house prices) is likely to just slowly deflate as opposed to burst suddenly. Have I understood?

Thanks

RHemmings

fimonkey wrote:

RH Hemmings... Sorry I don't quite get what you mean (my fault entirely). I don't understand why the market stabilising is such a bad thing, or will lead to house proces reducing (is this what you're saying)? I know ppl like to move up the housing ladder to bigger places etc etc, but surely if all property prices stabilise then that's OK?

I didn't say it was a bad thing. I think that it is very unlikely to happen in the current market situation. Because people are using equity that came from HPI to fund further HPI. Once prices depend on price rises, the market can no longer stabilise.

Generali

fimonkey wrote:

So a CDO is a loan that could potentially be used to stop ppl going bust? (And these didn't exist in the 80's)? Also, I hear it's now much easier to declare bankruptcy, or sort out an ?IVO (sorry can't remember the name of them, voluntary debt repayment things) so these will make it less likely for ppl to loose their homes and face repossession then? In that case I do see the whole picture regarding the 'Bubble' but my own thoughts are that this particular bubble (todays house prices) is likely to just slowly deflate as opposed to burst suddenly. Have I understood?

Thanks

A CDO is a way that banks can package up loans and sell them on. In theory it's a way for risks to be spread around more evenly and so reduce risk to each individual finance company.

The current bubble may deflate slowly, it may not even be a bubble at all! However, I can't think of a bubble in the past 400 years that has slowly deflated.

sunnyflower

We lost out in the house-price crash (owed 50 odd thousand on a flat worth less than 30), but we paid a fee to a firm called UNION FINANCE, who found a loophole in the law, allowing us to hand our keys in,and walk away from the huge amount of negative equity owed to the lender.

Does anyone remember them? They were closed down eventually, but not before thousands of people used their services.

We had an endowment policy going then as well, which obviously stopped, but I would like to know if we can still get the money back that we paid in for those few years we had the mortgage, or would the bank have seized that?
I've often wondered about this, but not known who to ask or how to investigate.
Any thoughts please?