A history of house price crashes - Yopa Homeowners Hub (2024)

In 2021 house prices surged at an unprecedented rate. Indeed, they have only been higher in comparison to earnings twice in the last 175 years. As such, it seems prudent to consider whether this growth can be sustained in 2022 or whether a pullback is likely.

So, firstly, how did we reach the current state of play inthe property market?

The pent-up demand from an industry which was forcibly shut down by the Covid-19 pandemic, competitive mortgages, low interest rates and Government incentives such as the stamp duty tax reduction, the furlough scheme and the mortgage guarantee scheme all played their part as both house prices and property transactions rose at a meteoric rate from July 2020 onwards.

2020 saw an overall price rise of 8.5% and in October 2021, the average house price was £268,349 according to official Land Registry data, up 10.2% in 12 months.

But can this price rise continue in 2022 and beyond? We look back at the most significant UK house price crashes over the last 100 years and consider the patterns which have emerged.

The 2008 financialcrash

The biggest fall in UK house prices in recent memory was brought about by the financial crash of 2007-2009, which occurred as a result of deregulation in the financial industry and mortgage brokers in particular. Indeed, 2008 saw the biggest recession since World War II, with house prices dropping significantly from the previous bubble of 2000-2007 (which saw an average property price rise from £100,000 to £225,000).

According to the Office for National Statistics, the average UK house price dropped by 15% from January 2008 to May 2009. Unfortunately unlike the recent ‘bounce back’ after the onset of the Covid-19 pandemic, in the wake of the 2008 financial crash properties did not achieve their pre-crash values until 2012 at the earliest. Indeed, property prices in Durham and Hartlepool in the Northeast of England are still yet to return to pre-2008 levels.

The recessionof the early 1990s

In 1989 and the early 1990s the western world experiencedanother period of economic downturn thanks to the US savings and loan crisis,restrictive monetary policies introduced by banks and building societies tocurb inflation, the end of the Cold War and the 1990 oil crisis in the wake of Iraqi’sinvasion of Kuwait. In the UK, house prices had also seen an artificial increaseas a result of prospective homebuyers rushing to purchase property prior to thewithdrawal of the MIRAS tax relief option in August 1988.

All of these issues in turn had a knock-on effect on consumerand business confidence and rising interest rates which resulted in a fall in houseprices of20%between 1989 and 1993. Properties in London were theworst hit, with an eyewatering reduction in value of 32%.

Interestingly – unlike the aftermath of the 2008 financialcrisis – current house price trends have also seen the capital miss out, with Londonexperiencing the lowest annual growth (6.2% as ofOctober 2021) of all UK regions. In contrast the biggest price spikes haveoccurred not in the pricey southeast of England, but in more rural, affordable regionssuch as the northwest of England, Wales and Yorkshire.

The mid-1970s

Despite a boomin homeownership and rapid property price growth from 1971-73 which saw the UKexperience what was arguably its first housing bubble in 1973, the decade also sawwidespread political and social unrest. The 1973 oil crisis and Yom Kippur War betweenIsrael and a coalition of Arab states and the industrial action of coalminersand railway workers at home which led to the infamous ‘three day week’ all resultedin a lengthy recession from 1973-1975. This saw house prices become stagnant ashigh unemployment and high inflation occurred in tandem. Although things didpick up again in the 1980s, with prices rising an impressive 16% and 25%respectively in 1987 and 1988. (Although this was not to last as we have seenabove).

The 1950s

House prices inthe post–World War II era of the 1950s declined by a hefty 7% (in real terms),one of the most significant declines of the past 70 years. This was thanks to thenation’s first downturn since the Great Depression of the 1920s. Following ahouse-building boom in the 1940s and early 1950s, by 1956 the UK wasexperiencing both economic and political setbacks. Namely increased inflation,unfavourable bank rates and the Suez Crisis.

The GreatDepression of the 1920s

Whilst not asbadly hit as the United States, where property prices had plummeted by around35% by 1932, the UK did experience a brief recession from 1921-22 which had aknock-on effect on house prices. Between 1926 and the outbreak of World War IIthe average UK house price only increased by £40 from £619 to £659. Incontrast, the average house price rose from £2,000 to £5,000 between 1950 and1970 and doubled between 1970 and 1973.

Interestingly, Prior to 1920 only a small percentage of around 25%of the UK population owned rather than rented their homes. The vast majorityrented from private landlords until the introduction of subsidies for localauthorities to build council houses via the 1919 Housing Act. Home ownership itselfdid not become popular until the latter part of the 20^th century,with nearly 75% of the population owning their own homes by 2000. This figurehas decreased somewhat in the intervening years (hitting 63% in 2018) as many first-timebuyers have been priced out of the market by hefty deposits and house prices,which hit eight times earnings as of 31 December 2021.

So, what do these previous house price crashes tell us?

Given the timings of the house price crashes we haveexperienced in more recent years, some industry experts have pointed towards the18-year property cycle, firstidentified by the British economist Fred Harrison, whereby the property marketfollows a sequence of events linked to the global economy.

If we consider the property crashes of the early nineties and 2008 for example, according to the 18-year property cycle theory, we should therefore expect to see a continued period of growth now prior to a pullback in 2026.

Whilst this is possible, estimates of a more conservative house price growth in 2022 and the intervening years from the likes of Savills (who forecast a 3.5% rise in 2022 and 15% overall to 2026) suggest that the property cycle is likely to have been expedited somewhat as a result of the unexpected Covid-19 pandemic. Buyers are also likely to feel more cautious going forward as Government incentives come to an end and the economy is still in a state of recovery and uncertainty around Covid-19 and Brexit.

Indeed, furthertax rises are due to come into play in the nextfew years and interest rates also rose in December 2021 for the first time since the Covid-19 pandemic began inan effort to quell rising inflation, suggesting that we are likely to see houseprice growth flatten out in 2022 rather than continue its meteoric rise.

Unlike previous house price crashes when rates for borrowing were high and the property industry became a buyers’ market thanks to a surplus of housing stock, the availability of competitive rates from mortgage providers and shortage in supply versus demand that we are seeing today means that we are also unlikely to see quite the same decline in house prices and resultant fallout for homeowners as experienced in the wake of the 2008 financial crash if we continue on the same trajectory.

Whilst the consequencesof the recent Omicron variant remains to be seen, housing demand has certainlyremained constant in recent months as homebuyers continue to prioritise more space and less urbanlocales.