History of UK House Prices

UK house prices have fallen significantly in the first 6 months of this year. It is the first major fall in
annual house prices since the great crash of 1989 to 2004 (where prices fell 20%)

The driving force behind the falling house prices are the shortage of mortgages available, especially
for first time buyers. Even though mortgage interest payments are not particularly unaffordable, many people
cannot raise a sufficient deposit or get any kind of mortgage. This is in sharp contrast to the years leading up to
2007, where the mortgage industry was very competitive and banks were keen to bring in new lending criteria
making it easier to lend.

The change in nominal house prices since 1994 is still very large. Even a modest fall of 10-20% will
leave house prices significantly higher than in 1994.

UK House Prices Index Historical Data

 This shows the history of nominal and real house prices in the UK between 1975 and 2008.
 It is based on data collected by the Nationwide, one of the UK's biggest mortgage providers.

 Nominal House prices = actual monetary value

 Real House Prices = House prices adjusted for inflation
Graph of UK House Price Index since 1952

Year Nominal House Prices Real House Prices

1975 Q1 £10,388 £72,405

1975 Q2 £10,728 £68,363

1975 Q3 £10,978 £66,980

1975 Q4 £11,288 £66,609

1976 Q1 £11,519 £65,458

1976 Q2 £11,739 £64,332

1976 Q3 £11,999 £64,285

1976 Q4 £12,209 £62,610

1977 Q1 £12,409 £60,469

1977 Q2 £12,689 £59,284

1977 Q3 £12,970 £59,690

1977 Q4 £13,150 £59,627

1978 Q1 £13,820 £61,626

1978 Q2 £14,491 £62,923

1978 Q3 £15,912 £67,863

1978 Q4 £16,823 £70,491

1979 Q1 £17,793 £72,443

1979 Q2 £19,075 £74,832

1979 Q3 £20,485 £75,292

1979 Q4 £21,966 £78,589

1980 Q1 £22,677 £77,402

1980 Q2 £23,348 £75,390

1980 Q3 £23,628 £74,729

1980 Q4 £23,497 £72,922

1981 Q1 £23,730 £71,883

1981 Q2 £24,098 £69,573

1981 Q3 £24,188 £68,728

1981 Q4 £23,798 £65,966

1982 Q1 £24,177 £65,913

1982 Q2 £24,679 £65,217

1982 Q3 £24,969 £65,662

1982 Q4 £25,580 £66,779

1983 Q1 £26,307 £68,348

1983 Q2 £27,386 £69,720

1983 Q3 £28,175 £70,809

1983 Q4 £28,623 £71,105

1984 Q1 £29,675 £73,295

1984 Q2 £30,833 £74,614

1984 Q3 £31,254 £74,959

1984 Q4 £32,543 £77,192

1985 Q1 £33,200 £77,724

1985 Q2 £34,174 £77,395

1985 Q3 £34,700 £78,340

1985 Q4 £35,436 £79,668

1986 Q1 £35,647 £79,560

1986 Q2 £37,015 £81,515

1986 Q3 £38,251 £84,151

1986 Q4 £39,593 £86,050

1987 Q1 £40,882 £87,787

1987 Q2 £42,987 £90,858

1987 Q3 £44,434 £93,731

1987 Q4 £44,355 £92,568

1988 Q1 £45,091 £93,651

1988 Q2 £48,932 £99,236

1988 Q3 £54,352 £108,692

1988 Q4 £57,245 £112,187

1989 Q1 £59,534 £114,793

1989 Q2 £62,244 £116,674

1989 Q3 £62,782 £116,567

1989 Q4 £61,495 £111,958

1990 Q1 £59,587 £106,591

1990 Q2 £58,982 £100,821

1990 Q3 £57,245 £96,248

1990 Q4 £54,919 £90,917

1991 Q1 £54,547 £89,818

1991 Q2 £55,418 £89,340

1991 Q3 £54,903 £88,114

1991 Q4 £53,635 £85,253

1992 Q1 £52,187 £82,524

1992 Q2 £52,663 £81,541

1992 Q3 £52,243 £80,949

1992 Q4 £50,168 £77,400

1993 Q1 £50,128 £77,841

1993 Q2 £51,918 £79,361

1993 Q3 £51,746 £78,874

1993 Q4 £51,050 £77,539

1994 Q1 £51,327 £77,849

1994 Q2 £51,362 £76,555

1994 Q3 £51,731 £77,052

1994 Q4 £52,114 £77,141

1995 Q1 £51,084 £74,948

1995 Q2 £51,633 £74,385

1995 Q3 £51,334 £73,757

1995 Q4 £50,930 £73,079

1996 Q1 £51,367 £73,315

1996 Q2 £53,032 £74,751

1996 Q3 £54,008 £75,977

1996 Q4 £55,169 £77,157

1997 Q1 £55,810 £77,587

1997 Q2 £58,403 £80,170

1997 Q3 £60,754 £82,590

1997 Q4 £61,830 £83,386

1998 Q1 £62,903 £84,569

1998 Q2 £65,221 £86,091

1998 Q3 £66,366 £87,317

1998 Q4 £66,313 £86,858

1999 Q1 £67,478 £88,761

1999 Q2 £70,010 £91,127

1999 Q3 £72,362 £94,113

1999 Q4 £74,638 £96,355

2000 Q1 £77,698 £99,906

2000 Q2 £81,202 £102,515

2000 Q3 £80,935 £101,999

2000 Q4 £81,628 £102,214

2001 Q1 £83,976 £105,277

2001 Q2 £87,638 £108,540

2001 Q3 £91,049 £112,700

2001 Q4 £92,533 £114,669

2002 Q1 £95,356 £118,100

2002 Q2 £103,501 £126,658

2002 Q3 £110,830 £135,166

2002 Q4 £115,940 £140,128

2003 Q1 £119,938 £144,151

2003 Q2 £125,382 £148,949

2003 Q3 £129,761 £153,727

2003 Q4 £133,903 £157,680

2004 Q1 £140,225 £162,912

2004 Q2 £148,462 £171,634

2004 Q3 £153,482 £176,395

2004 Q4 £152,464 £173,559

2005 Q1 £152,790 £173,471

2005 Q2 £157,494 £176,762

2005 Q3 £157,627 £176,268

2005 Q4 £157,387 £175,001

2006 Q1 £160,319 £177,801

2006 Q2 £165,035 £179,882

2006 Q3 £168,460 £182,049

2006 Q4 £172,065 £184,006

2007 Q1 £175,554 £186,258

2007 Q2 £181,810 £189,810

2007 Q3 £184,131 £191,490

2007 Q4 £183,959 £188,849

2008 Q1 £179,363 £182,997

2008 Q2 £174,514 £174,514

2008 Q3 £165,188  
 2008 Q4 £156,228  

2009 Q1 £149,702  

2009 Q2 £154,066  

House Prices Between 1975 and 2007 Q4.

 Nominal House prices increased by 1,672% or £174,000

 Real terms house prices increased by £119,085 or 164%
Between 1994 and 2008 Q2,

 Nominal house prices have increased by £123,000 or 241%

Biggest Falls in House Prices

The biggest falls in house prices occured between 1989 Q3 and 1993. House prices fell £12,614 or
20%

House Prices since 1985

PROBLEMS IN UK HOUSING MARKET

This is part of a series on problems in the UK Economy

The UK housing market is one of Britain's favourite topics of conversation. There is eith much (barely
disguised) gloating over how much your house is worth; or there is also a large section of new first time
buyers who despair at the cost of trying to buy a house. There also seems to be endless speculation about
the future direction of house prices. When it comes to house price predictions you can take your pick
anything between a 40% fall in prices and a 50% increase in the next 10 years. But, behind all the
newspaper headlines what are the real issues at stake in the housing market?

Problems in the UK Housing Market

1. First Time Buyers Priced Out of the Market.

According to the Halifax, average house prices are just over £197,000. Therefore, even on an income
multiple of 4 times salary, there are not may young people who earn sufficient salary to be able to buy a
house. Furthermore, many mortgage lenders are now expecting a bigger deposit; 10% of £200,000 is
difficult to save when you consider many graduates are leaving university with big debts. Due to the UK's
obessesion with owning a house, first time buyers have simply tried to get on the housing ladder through
taking out riskier mortgages such as interest only, or 100% mortgages. Therefore, young people have
become increasingly indebted in order to buy a house. The rising house prices has also caused
intergenerational inequality - people who bought 10 years ago have made capital gains, but, young people
will be forced to take on increasing levels of debt.

Possible solutions:

 Subsidised Mortgages for young peopl, but expensive and doesn't tackle fundamental problem of
high prices.
 Subsidised government building of housing. High prices are due primarily to the shortage of
supply. Building new houses will ease the long term lack of affordability.
 A move away from home ownership to renting - like on the continent. This requires a change in
people's expectations and may prove quite difficult.
2. Volatile Prices

The UK housing market is susceptible to booms and bust. For example, in the late 80s, house price
inflation exceeded 30%; this was followed by a year of house prices falling 15% (1992). In recent years,
house prices have risen by over 20% and now many fear a housing price drop. The volatility of the house
prices in the UK is due to a number of factors.
  People choose variable mortgages and take out large loans. This means mortgage payments are a
high % of income (over 20%) therefore, any change in interest rates has a significant impact on
affordability.
 Shortage of supply exaggerates any change in demand.
Possible Solutions.

 Encourage fixed Rate mortgages

 Encourage renting.
 Encourage the building of houses in property hot spots (not always easy to do.)

3. House Price Drop could cause a recession.

If house prices do fall in the UK, it will have an adverse impact upon consumer spending and consumer
confidence. House prices have become a key barometer to the economy. Rising house prices have also
been used to fund equity withdrawal and have caused a drop in the savings rate to 3%. If house prices do
fall, it will create negative equity and discourage spending; if the price falls are rapid this could cause a
recession in the UK.

Solutions.

 If consumer spending does fall the MPC is likely to cut interest rates because inflation will
hopefully be less of a problem. However, the MPC won't cut rates just to try and boost the
housing market - their primary target is low inflation. Furthermore, some would argue house
prices need to fall to correct a long term imbalance.
4. Shortage of Land

Many problems in the UK Housing market stem from a shortage of supply. However, the problem is that
building new houses is not so straight forward especially in the South East. Local councils are reluctant to
allow the building of houses on greenbelt land. They are also reluctant to encourage more pollution and
congestion in their area. The planning process tends to make it difficult to develop new land and local
councils usually have a NIMBY approach. More houses are fine - but not in this district.

Solution:

 Encourage building on brown field sites with greater housing density e.g. like the continent.
5. Mortgage Crisis

Due to problems in the US subprime market, there is difficulty in financing mortgage lending. This is
causing several mortgage products to be withdrawn e.g. 125% mortgages and 100% mortgages.
 However, maybe the idea of a crisis is exaggerated. True, mortgage companies are becoming
stricter on lending, but this is perhaps a desirable response to a period of very lax lending criteria.
Although it causes some inconvenience, especially for first time buyers, it does at least prevent
future problems in the market.
Why UK Housing Market Suffers Boom and Bust
Cycles
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Why The UK Housing Market Experiences Boom and Bust Economic Cycles

A boom and bust cycles refers to the rapid increase in prices, followed by a period of falling house prices. This
has occured on numerous occasions in the UK housing market, most notably during and after Lawson boom of
the late 80s

Reasons For Boom and Bust

1. Limited Supply.
Many factors make it difficult for the market to build new houses. When house prices rise, we don’t see a
corresponding increase in supply, simply because house builders take time to overcome planning restrictions.
Therefore, any change in demand creates a volatile swing in prices. If supply were elastic this wouldn’t occur.
Local councils have a strong ability to restrict the number of new houses built. Local councils also have an
incentive to stop houses being built, because voters prefer less supply and higher prices for their existing
homes.
2. Changing Interest rates.
Most homeowners in the UK choose a variable mortgage. This means that as the Bank of England base rate
changes, their monthly repayments change as well. Therefore, a small increase in interest rates can have a big
impact on people’s mortgage interest payments. If interest rates increase, then people may struggle to meet
their mortgage commitments and therefore, will have to sell. Because Mortgage payments are a big % of
income,  this is a serious problem for many homeowners.

 In other countries, more homeowners choose fixed rate mortgages; therefore, they are less sensitive to
interest rate changes.
3. Buyers take out Large Mortgage to Get on Property Ladder.
Because UK house prices are so expensive, people have been taking out unconventional mortgages to be able
to afford a house. These mortgages are a high ratio compared to their income. This means that mortgage
payments take nearly 50% of people’s disposable income. Therefore, it is easy for mortgages to become
unaffordable.

4. Volatility in Mortgage Lending.

One of the biggest reason for the current volatility in house prices, is the uncertainty in the mortgage sector. In
2006-07 mortgage lending was relaxed; low deposits were needed; banks were willing to lend high loans to
income ratio. However, after the credit crisis, mortgage finance has been drying up and many potential
homeowners are no longer able to get the necessary mortgage finance to buy.
5. Boom and Bust in Economic Cycle.
If the economy goes into recession, demand for houses will fall. When growth is high, people have the
confidence to borrow more. Demand tends to be income elastic. However, house prices falls in 2008 are due to
other factors.

6. Speculators
Rising prices encourage people to try and make capital gains. They buy houses to gain income and a rise in the
value of housing. When prices are rising, there are more buy to let investors pushing up prices. But, when
prices fall, speculators are likely to sell their houses and prevent a fall in wealth.

7. Poor Memories.
People often have poor memories and during a boom forget that house prices can fall. They assume that house
prices will go on rising forever.

Economic Impact of a Housing Crash

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If house prices fall significantly, they will not just leave homeowners with negative equity, they will also cause
serious economic consequences for the wider economy.

These are some of the most important factors.

1. Negative Wealth Effect.

Homeowners will see their major asset (housing) decline in value. Some who bought recently will see negative
equity (House is worth less than mortgage value). Therefore, they will have less confidence to borrow and
spend; they will try to increase the value of other savings, leading to a decline in consumer spending.
Householders will find it more difficult to remortgage, especially for the purpose of equity withdrawal.
Therefore, there will be a significant fall in spending caused by equity withdrawal. In the 1990s and 2000s
equity withdrawal played an important role in boosting spending and growth in both the UK and US.

2. Fall In Aggregate Demand. / Economic Growth

Because of the lower confidence and lower consumer spending there will be a fall in aggregate demand. It is
worth pointing out that housing is a significant determinant of spending in the economy. Consumption
accounts for 66% of AD, and housing is by far the biggest form of wealth. Housing has also become an
important barometer of the state of the economy – House price falls make front page headlines.

The fall in spending and aggregate demand leads to lower economic growth and possibly recession.
Lower growth will also increase unemployment.
3. Lower inflation Rates.
The slowdown in consumer spending will reduce inflationary pressures in the economy. This may enable the
MPC to cut interest rates as it will be easier to maintain the inflation target of 2%.

Evaluation
The impact depends on other variables in the economy. For example, if there was an increase in exports and  or
government spending, then AD may continue to rise. However, at the moment, the underlying prospect of the
UK economy looks weak. Industrial output and investment show signs of weakness.

Inflationary pressures may not fall because at the moment there is cost push inflation factors. For example,
rising oil and food prices is pushing up the inflation rate despite a slowdown in the economy. This makes it
difficult for the MPC to cut interest rates because inflation is going above their target. Therefore, they will be
unable to cut rates to help consumers and the housing market.

In the US, the government have tried very hard to avoid a recession. Government have cut taxes, and the Fed
have cut interest rates to 2%. So far the US, have just about avoided a recession.
House prices fell in the early 1990s by 15%, this was a significant factor in leading to a recession in the UK.

Housing Crisis
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There are many factors which led to the booming prices. In the UK, a large % of this
represented the fundamental disequilibrium between supply and demand. But, it was
also helped by:

 Increased availability of unconventional mortgages

 A strong social desire to get on the property ladder at all costs
 The reluctance of the Government to increase supply sufficiently
 A reluctance of the MPC to give any importance to a booming housing market,
focusing narrowly on CPI inflation.
The fall in house prices is a combination of declining affordability but, also the real
crisis in the mortgage industry sparked by the US subprime crisis. It is this lack of
affordable mortgages which is having the biggest bearing on house prices in the UK.
There are other factors suggested as well such as greed, estate agents and poor
financial regulation.

Who is To Blame for the Housing Boom and Crisis

With house prices falling in the US and now UK, it is worth asking – who if anyone is
to blame for the boom and bust in the Housing Market? This might help avoid a future
boom and bust in the future.

1. Monetary Authorities.

In the US, we can point to how low interest rates were in the period 2002-2003. With
interest rates less than 2%, mortgages became affordable to an increased number of
income groups. The Fed appeared unconcerned about the housing boom and did
nothing to prevent house prices rising rapidly. The same occured in the UK, the MPC
only targetted CPI inflation. By stating there was nothing to worry about, the
monetary authorities encouraged over confidence in the housing market and led to
rising prices. If the Fed or MPC had taken action to take the steam out of the housing
bubble, they would have avoided much of the boom and bust.

The Monetary authorities will defend themselves by arguing that the housing market
doesn’t fall into their remit. ALan Greenspan claims there was nothing he could do to
influence asset prices. [link] Their target is primarily low inflation and maintaining
economic growth – not house prices. The Fed argued that in 2002, the US faced a real
prospect of an economic downturn and they kept rates low to avoid this.

However, the weakness of this argument is that the housing market has a very
powerful influence on the economy. Because housing accounts for so much wealth in
the economy, falling house prices are sufficient to tip the economy into recession.
Therefore, Monetary authorities need to consider stability in the housing market as
necessary precursor to a stable economy.
The Government

The government will say that they are not responsible for house prices; they are
determined by supply and demand in the market. However, one area where the
government could have done more is in the regulation of financial markets.
Particularly in America, the mortgage sector behaved in a short sighted and
irresponsible way, lending to people who couldn’t afford payments. In this particular
area, the government made  a mistake in assuming the financial system could regulate
itself. Better regulation of the financial sector could have placed greater restrictions on
lending to new mortgage holders. If people needed to demonstate a better ability to
repay, many of the subprime defaults could have been avoided. In the US and UK,
there is a strong belief in the efficiency of markets and somehow government
regulation represents a failure. But, the subprime crisis illustrates how unrestrained
free markets can create serious problems for the whole economy.

In the UK, the government could have done more to increase supply, especially in
areas of high demand. Increasing supply would have helped deal with the shortage of
housing that was a major factor in rising prices.

Speculators.

It is argued this housing boom saw a rise in the number of housing speculators, such
as buy to let investors. This new speculative element pushed up prices; but now they
are falling, they will leave the market and cause prices to fall by a bigger amount.
However, most buy to let investors say they are investing for the long term not the
short term. Nevertheless any increase in the number of speculators  – people looking
for capital gains as opposed to buying a house to  live in it, will make the housing
market more volatile.
Estate Agents

Estate agents could be blamed for ‘talking up the market’.  – nncouraging higher
prices by mentioning the strength of the housing market and how unlikely it is that
house prices will fall. However, I find this argument rather tenuous. Estate agents may
talk up the strengths of the housing market, but this is insufficient to increase prices
unless there are real reasons behind them. At the end of the day, prices are determined
by what people are willing to pay, not what estate agents want them to go for.

Just Market Forces.

The other argument is that the boom in house prices merely represents the working of
market forces. With a shortage of supply in the UK, and rising demand, people were
willing to pay higher house price / income ratios causing prices to rise sharply. This
same factor explains why prices in the US are falling.

Greed

I put this down because I see it mentioned so often in newspaper comments. I think it
is a poor argument and reflects what could be termed ‘taxi driver economics’. Buying
a house, even at the height of the boom, was not necessarily a reflection of greed; but,
simply a reflection that buying a house offered various advantages to homeowners as
opposed to renting.. It wasn’t greed that caused people to sell house prices at a high
price, it was a reflection of the market forces currently in operation.

However, one area where the ‘greed argument’ is relevant is in the selling of subprime
mortgages to people who had poor affordability. Mortgage companies were mainly
interested in selling mortgages and not whether they provided a realistic loan to
vulnerable people. It was this misselling of mortgage loans which caused so many
problems in the credit markets.