First with Financial Comment from Arabia

UK housing slump to be worse than 1991-3

with 6 comments

During the 1991-3 housing slump I had a ringside seat as the Business Editor of Building magazine, the award-winning business journal covering the sector. In late 1990 I bet the Construction Correspondent of the Financial Times a good lunch that UK property prices would fall by 20% in 1991.

At that time UK property prices had not fallen in living memory, and it seemed a cast iron bet against a foolish young journalist. But 12 months later the Financial Times expense account was taxed for a lavish lunch as we drowned our sorrows after a painful year for house prices.

We neither of us had much call for celebration, both being home owners with big mortgages. At least we both kept our jobs and houses through the 1991-1993 housing slump, many did not. And I decided to put my money where my mouth was in early 1993 after the pound’s exit from the ERM and bought a Docklands house.

Buying low

My colleagues thought me completely mad, and I had to stretch my by then very limited finances to do it. But it was down 38.3% on its original selling price, a perfect Fibonacci retracement in fact although I only calculated that many years later. Indeed by 1998 I had sold out for slightly more than the original selling price.

Does this make me the ideal person to judge what is happening in the UK today? Probably not but it does establish my area of expertise and modest personal success. Part of the problem right now is that after a decade of rising prices everyone thinks they are an expert. It was very similar in the 1980s housing boom. Nothing changes, we all just get older.

Landing back in the UK last month after an absence of six months in my home Dubai I mainly met with a state-of-denial. Despite five months of falling house prices, record numbers of homes on the market and London agents reporting a 10% fall in selling prices, everybody I saw maintained that in their area prices were stable.

Denying the obvious facts in front of your face, let alone taking even a guess at what the future might hold is ridiculous. So where in the UK housing market going next?

Mortgage finance is crumbling with the withdrawal of products (HSBC’s First Direct has temporarily halted new mortgages), much tougher terms and conditions and higher interest rates. Moreover, people are more worried about their jobs and moving house can always wait.

Supply dynamics

So we have a very large supply of properties up for sale and a declining number of people with the finance to pay super-high price levels. And let us not forget that UK house prices have tripled in the past decade and are 50% above most fair-value models.

To start with the sellers will hold off lowering prices and maintain their state-of-denial. This leaves an illusion that the market is not so bad, high prices are still in tact. But as time goes on some people will actually have to sell, and cut their price to do so.

Then the floodgates are open and prices will tumble, just as they did in 1991-3. It is not an overnight phenomenon like stock markets can be. This is a painful drip-by-drip price decline until a market bottom is found.

Overshooting prices

Markets generally overshoot on the way down, so my forecast for 2008-10 is for a 60% decline for peak price levels, a higher Fibonacci retracement than in 1991-3.

The problem is that the collateral damage to the British banking system, which has grown fat and lazy on the back of a 15 year housing boom, will be cataclysmic. We have already seen the first bank failure in over 100 years with Northern Rock.

But what is in prospect is a UK version of the US sub-prime crisis with bank mortgage lending in crisis, and negative equity for millions. Higher than normal inflation levels and the devaluation of the pound will help to offset this debt misery but it will not be enough to prevent a very long and painful recession.


Written by Peter Cooper

April 3, 2008 at 5:17 am

Posted in UK House Prices

6 Responses

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  1. Sorry to be a pedant, but “May You Live In Interesting Times” was a curse invented by the English SF author Eric Frank Russell – and incidentally, Terry Pratchett is on record as being a fan of his work. I recommend reading the short story “And Then There Were None” which can be found (donated for free) on the web.

    David B. Wildgoose

    August 8, 2008 at 1:44 pm

  2. 60% eh! That’s the most dire prediction I’ve seen so far but that doesn’t mean that it shouldn’t be taken seriously. I think everything depends on how many forced sales there are over the next 3 to 4 years. Unless property owners find themselves having to sell because of unemployment, inability to refinance, the fact that BTL no longer stacks up, rising interest rates or credit card companies chaffing at the bit then many will try to ride out the storm.
    I do remember going house hunting in Bath in 1993 (and spending six months at it) and finding property after property that was on the market at levels 40% down on the ’89 peak. They we’re marginal properties either but nice Georgian places (mainly flats) in the £70-90K range (in the days when you could get a 4 bed Georgian town house with garden for under £100K – albeit next to a main road and not right in the centre).
    The central question is about fundamentals, which in normal times have been taken to mean a link between house prices and salary (affordability is a rather more fluid measure because whereas unemployment is clearly catastrophic anything short of that maintains the salary link whereas the affordability link is affected by interest rates and inflation). These relationships became badly distorted over the last six or seven years. Housing seemed expensive even by 2001, so the situation we arrived at last summer should have long previously made most sensible people very very wary. Instead people seemed to find reasons why it should be ‘different this time’. They say that the bear market starts when the last bear has capitulated – well that seemed true this time as the bears of 2004/5 had pretty much shut up by last year.
    For anyone who doesn’t have to sell and who hasn’t overstretched themselves even a 60% fall in prices is academic. However for everyone else it’s alarming. A 60% fall would wipe out the equity stake that most British homeowners have in their property and that means they would be unable to move and buy somewhere else. I suspect there’s a tipping point after which we get into a negative feedback loop, where people can’t move for work, where everyone is saving to try to crawl out of negative equity (and consequently consumer spending plummets) and where businesses start to collapse pushing up unemployment and prompting more distressed sales. Even for someone like me, who doesn’t own a house and who has been saving for years to try to get on the ladder, that scenario is pretty uncomfortable. We live in interesting times, as the ancient Pratchett proverb states.


    June 11, 2008 at 5:14 pm

  3. Banks are only as safe as houses

    As mortgage lenders struggle to shore up their balance sheets, a new crisis may be on the way from the buy-to-let market

    Heather Connon The Observer, Sunday June 8 2008 Article history

    House prices are already falling by more than 25 per cent a year. That is the figure the experts at M&G have come up with by extrapolating the last three-monthly house price statistics from the Halifax. The fund manager also warns that ‘UK house prices are set to fall a lot further’. Its prediction is based on the dramatic decline in the number of mortgages being approved – just 58,000 in May, the lowest level of approvals since the Bank of England began reporting figures 15 years ago.

    M&G predicts that this situation can only worsen: by the end of the year, approvals may well be running at 15 per cent below those of the previous year.

    Its figure may be the most dramatic, but other commentators are queuing up to increase their estimates of how far the market will slump. Last week, Howard Archer, chief UK and European economist at Global Insight, warned that prices could fall by 12 per cent this year and next, up from his previous prediction of 7 per cent in 2008 and 9 per cent in 2009, while UBS thinks a decline of 15 per cent to 20 per cent is possible.

    Indeed, it is only mortgage lenders themselves that appear to be in denial. Bradford & Bingley may have shocked the City with news of a sharp rise in arrears, write-offs of riskier investments and an unprecedented change to the terms of the £300m rights issue announced just last month, but it is still saying that the fundamentals of its lending business are ‘sound’ and that arrears and the rate of increase in bad debts will be less severe than in the first four months.

    HBOS, too, seems sanguine: percentage house price falls this year and next will be only in mid-single figures, the bank says – it should manage a ‘moderate’ amount of growth in new lending, at higher margins, and, while bad debts will increase, that will be from a ‘very low base’.


    June 8, 2008 at 1:55 pm

  4. A month later and the consensus has shifted closer to this apocalytic view – and recent monthly UK house price falls are in line with this forecast, although nobody will actually say this yet! The state of denial continues with hopes that Mr House Price Inflation Gordon Brown will somehow do something. It is far too late and the market will correct.


    May 8, 2008 at 10:00 am

  5. More comments would be welcome…


    April 15, 2008 at 11:54 am

  6. […] Read the rest of this great post here […]

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