With house prices soaring to new records over the last few years there have been many predictions that prices are about to crash. It doesn’t seem to have happened so far, however .... touch wood!

Here we’ll look at what might cause a house price crash over the coming years.

First, what can history teach us? What caused previous house price crashes?

Most experts consider there have been only four significant house price crashes in the UK market over the last 50 years or so. So what caused them?

In 1973-74 house prices dropped sharply in just one year. A house price ‘bubble’ which had been inflating for some time and which seemed unstoppable burst. Experts attribute the crash to factors including the energy crisis of the time and the poor lending policies of some banks, many of which were bailed out by the Bank of England.

In late 1979 and early 1980 house prices took another dive. They didn’t regain their losses until three years later, in 1982. Experts attribute this crash to the weak economy after a decade of industrial disputes and high inflation – and another energy crisis caused by the Iran-Iraq war. The new Conservative government also raised the interest rate to 17% try and control inflation.

In 1991-92 prices dropped 7.5% in just one year. The 1980s economic boom was faltering and fast rising house prices had begun to outstrip wages. So-called Black Wednesday caused a major economic shock to the UK economy.

In 2008-09 house prices dropped by over 15%. This was the biggest house price fall in recent times. And, although 15% is not that much as it stands it took house prices in many areas a full seven years to recover to their 2008 levels. The global financial crisis, initiated by the poor lending practices mainly of US banks, is blamed. Banks subsequently became very reluctant to grant mortgages even though the interest rate was slashed.

So if there is to be another house price crash what could cause it?

Let’s look more closely at the factors involved in previous crashes:

A bursting bubble: Two of the last four crashes have been caused by poor mortgage lending practices. Practices have been greatly tightened up since 2008 however. Despite some experts warning of a bubble since about 2010 there have been no signs that it is about to burst.

Economic problems: The economies of all the major world economies have been hard hit over the last two years, mainly as a consequence of Covid. Although many were struggling before 2020 anyway. However far from a crash house prices in many countries worldwide, the UK included, have exceeded all records. Oddly, in tricky economic times, people have shown they are more interested in moving and taking on new commitments rather than less as has historically been the case.

Unemployment was a factor in the 1970s market crashes. However employment levels in the UK remain positive with many unfilled vacancies.

Rising interest rates: Interest rates have been implicated in previous crashes. 2008-09 was an exception, as rates actually fell to then record lows. Even though interest rates are nudging up now they’re unlikely to ever reach the 17% base rate that was introduced in 1979.

The cost of living: Rising day to day living costs make it more difficult to afford an existing mortgage let alone a new, bigger one. In the 1970s high inflation and wage restraint were almost certainly dampening factors in the property market. Since the 1990s, however, the UK has become used to consistent wage growth alongside low inflation which undoubtedly have helped to fuel the housing market. With the cost of living rising sharply now many experts will be watching carefully to see how something which has not really been a consideration for over 20 years impacts the property market.

An energy crisis: It has generally been forgotten that two of the last four property price crashes have involved an oil/energy crisis. The Middle East remains as unstable as ever, and the Russia-Ukraine situation is a new flashpoint with implications for energy supply and prices.

So will any or all of these factors cause another house price crash over the next few years?

It’s really impossible to say. It’s impossible to directly compare 2022 with 1973 or 2008. However it’s very true to say that ALL of these factors have something of a proven track record in causing house price crashes over the last 50 years, so they are something that everyone in property will want to bear in mind.


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