House price history – what you need to know

3rd August 2012

Anatomy of a house price slump – how it happened

The party finally came to a sticky end for UK property prices in 2008. After a decade long boom, the market peaked in late summer / autumn 2007, and then prices tumbled as banks beat a hasty retreat from easy lending.

House price falls accelerated through 2008 and property market activity hit record lows in late 2008 and early 2009.

The property market’s performance in 2008 was worse than almost all of the gloomiest predictions made for the year.

Of the major reports, the gloomiest picture was painted by the Halifax. Its index showed the average property losing a greater percentage of its value in just 12 months than during the whole peak to trough period of the 1990s crash.

In December 2007, the Halifax index said the average home was worth £197,074, a year later this had fallen to £159,896 ‘ a drop of 18.9 per cent. At the peak before the 1990s crash, Halifax’s figures show the average home was worth £70,247, in May 1989. Six years later, property prices bottomed out, in July 1995, at £60,965. This was a peak to trough loss of 13.2 per cent, although it was much larger in real terms.

The Land Registry’s report showed property prices falling by 13.5 per cent over the year, with the average home in England and Wales worth £158,946 ‘ a similar value to October 2005. Even in the supposedly robust London market, the average home lost 12.9 per cent, or £45,585, to end 2008 worth £307,071 ‘ a similar value to November/December 2006.

How the property market was hammered?

While property price statistics for 2008 and early 2009 painted a fairly bleak picture, they did not fully reflect the devastation wreaked so rapidly.

In a little over a year, a booming property market became desolate, with the Royal Institution of Chartered Surveyors reporting its agents selling less than one property per week of the year.

A perfect storm hit the UK property market in 2008. With property prices having risen by 200% in the ten years to December 2007, according to the Land Registry, property was in a bubble.

Many economists had predicted that this bubble was ripe for bursting, but after showing signs of a slowdown in 2005, the market sped up again and the average price peaked between August 2007 (Halifax: £199,612) and January 2008 (Land Registry: £184,784).

The pin that burst the bubble was the credit crunch. The sub-prime crisis that had been brewing in the United States erupted in the summer of 2007, and as the year continued, the residential mortgage-backed securities market that had driven massive growth in credit for homeloans essentially ceased to exist.

These allowed lenders to sell packaged residential mortgages to a special purpose vehicle, which then issued debt to investors, lured by strong returns from a supposedly liquid and low risk investment.

According to the interim report by Sir James Crosby, commissioned by the Treasury, between 2000 and 2007, the total amount outstanding of UK residential mortgage backed securities and covered bonds rose from £13bn to £257bn. The report said that by 2006 mortgage-backed security funding accounted for two-thirds of new net mortgage lending in the UK.

In July 2007 this market came to an ‘abrupt halt’, according to Crosby. This brought about the collapse of Northern Rock in the UK, problems for banks such as Bradford & Bingley that had fuelled the buy-to-let boom and major issues for all mortgage players. In February 2008, Northern Rock was nationalised and American bank Bear Stearns, which had specialised in the fancy finance that fuelled the mortgage boom, collapsed. It was the final sign that the party was over.

Banks fearful of huge losses began to dramatically cut back on mortgage lending and a vicious circle began. The more banks cut back on lending and raised deposits, the fewer homebuyers could secure finance, the more property prices fell and banks became more fearful and cut back further on lending.

The mortgage crunch and property prices

Mortgages are the key to the property market. The vast majority of buyers cannot purchase a property without a homeloan and the price, availability and restrictions imposed on these have the biggest impact on their ability to buy a home.

The dramatic slump in property prices in 2008 and early 2009 came as lenders turned off the mortgage taps. Lenders suffered a lack of funding, with the mortgage backed securities market that accounted for two thirds of new lending suddenly seizing up. Meanwhile, banks were also hit by a crisis of confidence, as they looked over the Atlantic and saw the devastation wreaked in America heading for the UK.

Mortgage rates rose, deposits were hiked and reports abounded of lenders pulling mortgages at the eleventh hour. Mortgages for home purchases dived by 49 per cent in 2008, to just 516,000, according to the Council of Mortgage Lenders. This was the smallest number since 1974 and represented a third less than the 723,000 approved in 1991 ‘ the lowest level of the 1990s slump.

The Bank of England’s monthly figures have also shown mortgage activity drying up. The number of mortgages for homebuyers hit a record low of 27,000 in November 2008.

In September 2007, just before the downward spiral began Bank of England figures showed mortgage approvals for homebuyers of 102,000 ‘ significant at that time as this was the lowest level for two years.

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