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reasons against another property crash

 

In addition to the Berlin wall coming down, the year of 1989 saw the start of a property crash that was to last until 1994, during which prices fell by about 15%. Is history about to repeat itself? Listen to the doom and gloom merchants and they'll try and convince you that it is, but here are five solid reasons why there will be no repeat of that crash:

 

1. At the end of 1989, interest rates were running at a colossal 15%, having risen 76% from the start of the previous year. This had a strong impact on affordability. Contrast that with the current interest base rate of 5.5%, a rate which is widely expected to drop to 5.25% next year.
2. The average house price in the UK rose by 10.9% in 2007. In 1988 it rose by an unsustainable 32.9%.
3. The rate of economic growth was far slower in 1989, moving into recession at the start of the 1990s. In comparison, GDP (Gross Domestic Product) is still growing, although the rate is expected to slow to 2.2%.
4. Today, net household incomes are roughly 6% more than basic expenditure (including housing costs). In the third quarter of 1988 the same comparison showed a deficit of 10%, which rose to more than 30% by the end of 1989.

5. Housing supply continues to grow far too slowly to meet increasing demand. Simple economic reasoning suggests that when goods are scare, prices go up.

 

Date
Rate (%)
04/07/88
10
18/07/88
10.5
18/08/88
11
25/08/88
12
25/11/88
13
24/05/89
14
05/10/89
15

 

Bank of England base rate, July 1988 to October 1989 (Source: Bloomberg)

 

 

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Comparison of Earnings to Average House Price From 1975, clearly showing the crash around 1990




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