Date:9 June 2009 I Comments: 9 I Views:13,648

There are varying predictions about the direction house prices will go in the coming months and years.

Predictions range from up by 25% over the next 5 years (according to the National Housing Federation) to down 50% by 2011 (according to

It’s possible to approximate the anticipated extent of the house price crash by analysing graphs of previous housing crashes.

Provided the crash is comparable to previous crashes in terms of market conditions and contributing factors it may be a reasonable way to predict one possible outcome.

Let’s look at a graph!

The most recent crash in 1989 took 7 years to reach its trough and 13 years to return to its former highs.

But the crash in 1980 only took 2 years to reach the trough and 5 years to bounce back to former levels.

So what are we facing? A long sustained drop in house prices or a quick ‘correction’?

It’s not possible to predict from looking at one graph when there are so many contributing factors but one which I think plays a bigger part than others is the ratio of house prices to earnings.

The ratio is calculated using average house prices and average income figures.

According to Halifax: ‘The house price to earnings ratio – a key affordability measure – is at its lowest for six years. The house price to average earnings ratio has declined from a peak of 5.84 in July 2007 to an estimated 4.42 in February 2009; a fall of 24%. The ratio is at its lowest level for six years (February 2003: 4.41). The long-term average is 4.0.’

So for the ratio to equal the long term average of 4 it needs to drop another 9.5%

House prices are already down 21% since the peak in 2007 so another 9.5% makes 30.5%.

The National Housing Federation justifies its claims of a 25% increase on the basis that there is a huge demand for housing in this country and the natural laws of supply and demand will bring about a reversion to the current decline.

But one more very important factor is driving the current decline and that is the availability of credit.

9 US banks already claim to be able to repay their bailout money to the government and Northern Rock repaid half it’s loan early so is this a good sign?

Lloyds Banking Group are closing all the C&G branches and threatening another 1500 UK jobs which doesn’t look good but that’s because they made a bit of a poor judgement call when they bought HBOS and not just due to continued economic decline.

House prices needed to drop. They were getting silly and what we are seeing is a very swift correction.

It looks like banks are picking themselves back up and dusting themselves off already and there are some very attractive introductory savings rates being offered. (Abbey 6% for the first 12 months on balances up to £2500)


Category: General


  1. Kate

    Moodys stress tested building societies as “the assumption now is 40% falls”, but they stress tested for 60%. The FSA too stress tested for 50% falls and 2 more years of recession, they had good reason to do this. £200bn in mortgage lending has gone with the closure of the RMBS market which financed the bubble from 2001 culminating in financing nearly 2/3rds of the mortgage market by 2007. Lenders are now reliant on dwindling deposits and are also having to rebuild their books and mortgage lending is already down nearly 2/3rds this year. Economists agree that until approvals double the market will not stabilise, and Nationwide / Halifax etc agree that prices ONLY look like they are going up because of a shortage of properties coming on the market. Advice to buyers, DON’T BUY, you have NOTHING to lose by waiting but plenty to gain. Property will fall 35% minimum, meaning a £300000 property will be £195000 by the end of the year. A survey of lenders said they expected at least a further 10% this year and prices are NOT going up anytime soon, the lenders agree that when more properties come on the market house price crash will resume.
    I not sure what sellers are waiting for, but as this article confirms AFTER property bottoms (somewhere between 35 – 60%) it will only go back up in line with wages and inflation as the market has done historically prior to the recent bubble.

  2. Geoff

    The 6% Abbey are paying is on balances UP to £2500 and you have to pay in at least a £1000 per month….a few important details.

  3. T Miller

    I could not agree more, why anyone is buying now is beyond me. We have a long way to go before we hit the bottom, a very long way!

  4. j dickinson

    I’m not sure where Halifax get their figures from but I thought the average wage was around 28K. With the average house at around 154K their multiple of 4.42 suggests an average wage of around 35K….. don’t know many people in my locality earning such a wage

  5. slim

    None of this clever analysis and extrapolation matters, it just gives people something to do.

    Look in the estate agent window or on rightmove. Are prices continuing to fall? YES

    By how much and for how long is vague and innacurate speculation however much fun the maths might be.

    When the prices stop falling in the Estate agent window for a sustained period, buy. When they start to fall, sell quick

    It’s worked for me so far and am up by 250k buying and selling my own home at the right time for 15 years.

    It’s really not rocket science.

  6. The price in the estate agent window is determined by the demand for property.

    Credit is not readily available and public confidence is down. The more news there is of house prices dropping the less likely people will buy but estate agents need to survive so they encourage vendors to accept lower offers.

    If credit was still readily available there would still be a demand for property and prices would reflect that.

    In fact, there is a demand for property, it just can’t be fulfilled because of the lack of credit.

    House prices do still need to drop to make them more affordable because when houses are more affordable there is less risk of default, lenders are happy to lend and the wheels turn.

  7. citydave

    I agree with most of the above however i would sound one word of caution. You can wait 12-24months to get on at the bottom but by that stage 3/5 year fixed rates might be up at 8-10%. City IR swap prices increased 0.5% in just 4 days last week. Inflation will return will a vengence, it’s guaranteed. So its a balancing act between capital values and cost of funds.

  8. First of all you cannot compare the correction of 1980 to that of 89/93-95 because prices didn’t go into negative growth. Growth simply slowed, in the way that UK house prices have been controlled since 1952.

    If you had compared the house prices to earnings ratio during the last crash comparable to this 1989-95, house prices fell from 3.9 times the avg. salary to 2.1 times the avg. salary. As they were at 5 times this time, they will probably fall to 3 times. And if you look at the average mortgage repayment as a percentage of FTB salaries on a historical indice the result is even more scary.

    I have done all this research in articles on my site


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