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Magpie

Why Was It Different Last Time?

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There was an interesting recent thread about deflation and inflation which made me think about the house price cycle. The most common cycle in UK house prices has been a period of excessive increases followed by a period of stagnation. Stagnation is of course a real fall as inflation allows wages and other assets to increase against property. But widespread nominal falls (rather than real falls) in house prices only happened in the 1989-1995 crash, not in the two crashes that preceded it.

So really it was "different last time". But what was the reason, and why should this time be nominal falls like the 1989-95 crash rather than stagnation as previously?

There's at least three obvious factors I can see - the two previous crashes happened in a high inflation environment, which allowed an equilibrium to be restored quicker. There's the role of sentiment. I remember a lot of talk of negative equity and repos from quite early in the last crash and that obviously created a momentum. And finally the high interest rates through 1989-91 (as well as later on Black Wednesday) were causing repossessions which drove the market down.

Looking at these three factors, sentiment, high IRs, and high inflation: Sentiment is still unpredictable. IRs might rise at some point, but it remains to be seen whether they will go high enough to cause real pain. Inflation is complicated - I don't see that high inflation could actually be a causal factor in whether you have HP stagnation or falls - it's more of an explanation after the event, and stagnation now would still cause real falls, just over a longer timeframe.

I can see how it all might come together to cause a repeat of 89-95, especially if high IRs cause high repos. But when we talk about the inevitable property cycle, are there any other reasons I've missed why it might not end up being the stagnation or very small falls version of the cycle instead?

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There was an interesting recent thread about deflation and inflation which made me think about the house price cycle. The most common cycle in UK house prices has been a period of excessive increases followed by a period of stagnation. Stagnation is of course a real fall as inflation allows wages and other assets to increase against property. But widespread nominal falls (rather than real falls) in house prices only happened in the 1989-1995 crash, not in the two crashes that preceded it.

So really it was "different last time". But what was the reason, and why should this time be nominal falls like the 1989-95 crash rather than stagnation as previously?

There's at least three obvious factors I can see - the two previous crashes happened in a high inflation environment, which allowed an equilibrium to be restored quicker. There's the role of sentiment. I remember a lot of talk of negative equity and repos from quite early in the last crash and that obviously created a momentum. And finally the high interest rates through 1989-91 (as well as later on Black Wednesday) were causing repossessions which drove the market down.

Looking at these three factors, sentiment, high IRs, and high inflation: Sentiment is still unpredictable. IRs might rise at some point, but it remains to be seen whether they will go high enough to cause real pain. Inflation is complicated - I don't see that high inflation could actually be a causal factor in whether you have HP stagnation or falls - it's more of an explanation after the event, and stagnation now would still cause real falls, just over a longer timeframe.

I can see how it all might come together to cause a repeat of 89-95, especially if high IRs cause high repos. But when we talk about the inevitable property cycle, are there any other reasons I've missed why it might not end up being the stagnation or very small falls version of the cycle instead?

You raise some very valid questions.

Like it or not, and I don't, things at the moment are not working out like 89-95. I lived through the 89-95 period, and in fact sold and bought a house in 1990. Nominal prices dropped like a stone and the situation felt very different from now.

I don't say real prices will not fall. In fact I think they will - and for a very long time. One question I think we need to be asking is whether the cycle will continue at all, with a fall followed by a pick up in a few years time or whether we are in for a long but slow decline over decades.

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One question I think we need to be asking is whether the cycle will continue at all, with a fall followed by a pick up in a few years time or whether we are in for a long but slow decline over decades.

Ah yes, another interesting (and slightly depressing) way that the cycle might be "different this time". I can certainly imagine a long slow grind, down a bit, stagnant a bit, then down a bit more. That's where the lack of high inflation might be telling because wages won't catch up fast enough to make property look like good value again for a long time if we have slow falls and slow inflation.

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You raise some very valid questions.

Like it or not, and I don't, things at the moment are not working out like 89-95. I lived through the 89-95 period, and in fact sold and bought a house in 1990. Nominal prices dropped like a stone and the situation felt very different from now.

I don't say real prices will not fall. In fact I think they will - and for a very long time. One question I think we need to be asking is whether the cycle will continue at all, with a fall followed by a pick up in a few years time or whether we are in for a long but slow decline over decades.

What was the actual "trigger" that began the crash in the 80's? Once it started, how did it gather full momentum i.e. the snowball effect.

I was only 14 in 1989 - can anyone fill me in? Thanks

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What was the actual "trigger" that began the crash in the 80's? Once it started, how did it gather full momentum i.e. the snowball effect.

I was only 14 in 1989 - can anyone fill me in? Thanks

From late 88 to late 89 interest rates went up a long way (about 8% to 15% in stages?) in response to economic problems, and this triggered a lot of repossessions. This is probably the clearest trigger for the falls though some would mention other factors. Black Wednesday in 1992, when our ill-advised membership of the ERM fell apart, and interest rates just about doubled in a day (before quickly falling again), was a last nail in the coffin after a couple of years when there had already been serious falls and a loss of faith in the property market.

Incidentally, I think that property in the UK has also fallen in nominal terms in the more distant past - I believe that the 1930s depression caused falls on the same sort of scale as 1989-95, so there are precedents for both kinds of crash.

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One question I think we need to be asking is whether the cycle will continue at all, with a fall followed by a pick up in a few years time or whether we are in for a long but slow decline over decades.

No. Demand for shelter is too great in these crowded isles. Even if a crash occurs, underlying demand remains, which is underpinned by immigration.

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From late 88 to late 89 interest rates went up a long way (about 8% to 15% in stages?) in response to economic problems, and this triggered a lot of repossessions. This is probably the clearest trigger for the falls though some would mention other factors. Black Wednesday in 1992, when our ill-advised membership of the ERM fell apart, and interest rates just about doubled in a day (before quickly falling again), was a last nail in the coffin after a couple of years when there had already been serious falls and a loss of faith in the property market.

Incidentally, I think that property in the UK has also fallen in nominal terms in the more distant past - I believe that the 1930s depression caused falls on the same sort of scale as 1989-95, so there are precedents for both kinds of crash.

Thanks for that. Can anyone expand on the "economic problems" that caused interest rates to rise so drastically?

Now that rates are set by the BoE Monetary Policy Commitee and not by central Government for their own ends, are we buffered (at least somewhat) by what happened last time around with the interest rates shooting up so quickly and to such a high?

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No. Demand for shelter is too great in these crowded isles. Even if a crash occurs, underlying demand remains, which is underpinned by immigration.

I'm not convinced by the supply and demand argument. There's clearly enough supply in one respect - in so far as we don't have massive levels of homelessness. Sure, not everyone can buy what they want, but most people can find a place to live, immigrants included. (Plus if we get into a recessionary period, there may be less immigration).

The demand and supply curves are not just about "how much demand" there is (of course there is an infinite amount of demand if prices fall to zero, to take an absurd extreme) - it is about how much demand there is at a particular price, and that's what creates the pressure for prices to rise and fall. So the "underlying demand" only supports prices if prices are seen to be affordable or rising. Our population wasn't falling from 1989-95 but demand really dried up, or applied at much lower prices.

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No. Demand for shelter is too great in these crowded isles. Even if a crash occurs, underlying demand remains, which is underpinned by immigration.

The country hasn't got any smaller in the last few hundred years - in fact greater land is available for development because land has been drained and industrial areas have been converted to housing. Yes, there are more people but that only relates to being demand because people want at least 2 houses each (it appears in London at least) - that is a sentiment driven thing. If people lived like they did 10 years ago, there would be a massive surplus of housing.

There has always been immigration - for centuries... it hasn't stopped crashes before.

dogbox, you can't fool us with such short-sighted posts. Anyhow, I thought you had turned bear?

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From late 88 to late 89 interest rates went up a long way (about 8% to 15% in stages?) in response to economic problems, and this triggered a lot of repossessions. This is probably the clearest trigger for the falls though some would mention other factors. Black Wednesday in 1992, when our ill-advised membership of the ERM fell apart, and interest rates just about doubled in a day (before quickly falling again), was a last nail in the coffin after a couple of years when there had already been serious falls and a loss of faith in the property market.

Incidentally, I think that property in the UK has also fallen in nominal terms in the more distant past - I believe that the 1930s depression caused falls on the same sort of scale as 1989-95, so there are precedents for both kinds of crash.

in the inflation/deflation thread http://www.housepricecrash.co.uk/forum/ind...pic=29097&st=20

I made the point that ONLY unemployment or interest rate rise looked likely to trigger a HPC. I don't really see how interest rates would go back up to 15% levels since consumer demand is already low and unlikely to increase too much. So unless they start to outsouce all the city jobs to the far east i don't see how the HPC will begin.

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Thanks for that. Can anyone expand on the "economic problems" that caused interest rates to rise so drastically?

Now that rates are set by the BoE Monetary Policy Commitee and not by central Government for their own ends, are we buffered (at least somewhat) by what happened last time around with the interest rates shooting up so quickly and to such a high?

If you google 1989, interest rates, house prices or somesuch you'll get some stuff on the economic situation.

To your second question, I'd say no, we're not buffered, but the Government hopes it is buffered from the blame... If the global situation gets back to a high interest rate environment, the MPC is likely to be forced to move rates higher. But personally I doubt they are going back quite so high in the short to medium term, even though there may be some rises coming.

I made the point that ONLY unemployment or interest rate rise looked likely to trigger a HPC. I don't really see how interest rates would go back up to 15% levels since consumer demand is already low and unlikely to increase too much. So unless they start to outsouce all the city jobs to the far east i don't see how the HPC will begin.

I tend to agree, but I don't think IRs have to go anywhere near 15% to cause problems - a lot of people have pretty heavy repayments on 4-5% mortgages, so a few per cent more could cause real problems. But there are a lot of fixed rates around these days (I could be wrong but I think they were harder to get in the 80s), so it might be a slightly delayed reaction if there are big rises.

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What was the actual "trigger" that began the crash in the 80's? Once it started, how did it gather full momentum i.e. the snowball effect.

I was only 14 in 1989 - can anyone fill me in? Thanks

Until 1988 you could get MIRAS tax relief on the first £30,000 of your mortgage. A married couple got one lot of tax relief. Two people buying together got two lots of tax relief.

The chancellor announced in the March 88 budget that dual MIRAS would be abolished but not until August. This caused a rush of single buyers to get together with a friend to buy a £60,000 2 bed property before the August deadline.

So for a few months the market went crazy with first time buyers. August came and went, so did the first time buyers.

I remember it well. I put a £50k property up for sale with an asking price of £62k. Sold it for £60k to two young mates with completion on the very last day before dual MIRAS finished.

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Until 1988 you could get MIRAS tax relief on the first £30,000 of your mortgage...

Thanks - a bit more use than me telling him to google it...

Can you remember why the IRs went up that year. Was it an attempt to control increasing inflation?

Edit - oh, there was also all the stuff about the Lawson boom, trying to keep sterling pegged to the Dmark, not raising IRs earlier etc. It's all pretty complicated now I start to remember more of it...

Edited by Magpie

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Thanks - a bit more use than me telling him to google it...

Can you remember why the IRs went up that year. Was it an attempt to control increasing inflation?

The final hike (The headline one that everyone talks about going from 10% to 15% in one day (and back down to 12% - I think)) was a last ditch attempt from Lamont and Major to keep sterling in the Exchange Rate Mechanism (ERM), in the face of a massive run on the pound instigated by currency speculator George Soros.

Under ERM we were comitted to holding sterling within prescribed bands against other european currencies. The government manipulated the value of sterling by altering exchange rates.

Not sure about whether the 10% was a function of the ERM or Inflation though.

I have rudimentary knowledge of the whole affair as I was on my Uni hols in Crete holding a large number of Sterling travellers cheques that suddenly didn't buy as much Amstel as they had the day before.

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Not sure about whether the 10% was a function of the ERM or Inflation though.

I'm under the impression that at the time speculators were selling the pound in the hope to devalue it - the high interest rates going up to 15% was to tempt them to keep & hold their pounds

presumably interest rates were mainly used as an exchange rate control at the time

Edited by godsakes

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The final hike (The headline one that everyone talks about going from 10% to 15% in one day (and back down to 12% - I think)) was a last ditch attempt from Lamont and Major to keep sterling in the Exchange Rate Mechanism (ERM), in the face of a massive run on the pound instigated by currency speculator George Soros.

Yes, Black Wednesday, when Amstel got a bit more expensive... but that was in 1992, so people are misremembering it when they talk about it as a main trigger for the crash. The crash was well underway by then.

I think it did a lot to scare people off being enthusiastic about property for another few years though, which probably contributed to the final falls being even bigger than they would otherwise have been. Probably also the cause of the market being significantly undervalued in 1994-5 and people still treating it with caution.

The rises in 1989 were in stages and I think for a more complex set of reasons. I just looked up Nigel Lawson on wikipedia and that gave a few reminders. I'd rather not summarise it though because it's too boring...

I'm under the impression that at the time speculators were selling the pound in the hope to devalue it - the high interest rates going up to 15% was to tempt them to keep & hold their pounds

Yes, the UK government was committed, under the ERM to keeping the £ within a narrow band (it was probably mispriced in the first place, see Lawson, 3 Dmarks etc). This proved difficult to do, especially once the speculators moved in. Soros' (and others') basic plan was to sell huge reserves of the £ to drive the price down, then force the government to give up, meaning that they could buy back their huge reserves at much cheaper prices. This cunning plan succeeded completely - the hike to 15% was a last ditch attempt, immediately followed by lowering the rates and announcing our withdrawal from the ERM. It was an accident waiting to happen and Lamont and Major didn't help by dithering and trying to stay in the ERM beyond the point at which it was clear this was going to fail.

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Until 1988 you could get MIRAS tax relief on the first £30,000 of your mortgage. A married couple got one lot of tax relief. Two people buying together got two lots of tax relief.

The chancellor announced in the March 88 budget that dual MIRAS would be abolished but not until August. This caused a rush of single buyers to get together with a friend to buy a £60,000 2 bed property before the August deadline.

So for a few months the market went crazy with first time buyers. August came and went, so did the first time buyers.

I remember it well. I put a £50k property up for sale with an asking price of £62k. Sold it for £60k to two young mates with completion on the very last day before dual MIRAS finished.

Interesting, thanks

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Why it was different last time is because the low point in interest rates was mid 1988 when base rate fell to a low of 7.375%. Subsequently rates nearly doubled from the low point.

2003's low point in base rate was 3.5%. It will only take 7% base rate this time to more or less double the

interest payments on a 2003 tracker type mortgage.

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Why it was different last time is because the low point in interest rates was mid 1988 when base rate fell to a low of 7.375%. Subsequently rates nearly doubled from the low point.

2003's low point in base rate was 3.5%. It will only take 7% base rate this time to more or less double the

interest payments on a 2003 tracker type mortgage.

Actually I've seen this said a few times here, so I just tested the figures. They are of course right for IO mortgages. But for repayment mortgages (unless I'm doing the sums wrong) it would take a rise from 3.5% to 9.25% to equal the impact of the 7.375% to 15% rise in the overall mortgage payments.

The reason being that overall repayments don't double when IRs double but go up by about 74% for the 1989 example, while from 3.5% to 7% only puts repayments up by 40%. Still pretty bad of course, and very painful for anyone on a variable or variable IO, but it does give a bit of perspective on why the 1989 and 1992 rises were so horrific.

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The difference this time is that we have MASS immigration, which is impacting on wages.

All the complicated stuff about ERM etc.. is irrelevent other than interest rates, which control how much people borrow, where held very low for a long period, and let a lot of money into the economy.

In the early 1990s, there was controlled immigration, the workforce was pretty much fixed, other than by natural population growth (children). Just as Housing stock is fixed, human capital was fixed and wages quickly rose, and an inflationary spiral occured which the bank had to stop with sharp rate rises. The effects of the money inflation worked through the system for 2 more years, which kept rates high. People could afford houses from 93, and thier was a great boom in capital productivity shortly afterwards.

It is different this time, because the government, largely by stealth and deceit, has been using truely massive numbers of immigrates to enter the workforce, while massive amounts of cash also drive up asset prices. Wages cannot catch up for most people.

In many ways Ireland entered the ERM years ago, has interest rates way too low for its economy and is dependant on immigration to drive down wages and sustain a huge boom. Unless you believe that millions and millions of people who have arrived here, are just going to leave the UK (which will not happen), people are pretty much priced out forever, and as people on this site keep saying - renting from a (tax advantaged investor) will always be cheaper than buying.

Edited by brainclamp

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The difference this time is that we have MASS immigration...

We're not talking about why it's different this time, but why last time was different to the times before. I don't think even you can blame the 1989 crash on immigration.

Also I've said elsewhere, increased demand does not automatically force house prices up - only the whole demand and supply curve moving does that, which is far more likely to be caused by investors than by immigration. And countries who have very different immigration regimes have had similar HPI to the UK. So even if it is a small part of the reasons for current HPI, it is only one factor among many.

To sum up:

1) I don't agree with you

2) In this case you are off-topic anyway

Edited by Magpie

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brainclamp please don't BNP this thread, it was just getting interesting

What caused the last crash seems to be a combination of the cost of debt increasing and economic uncertainty.

Seems to me, if you want a HPC you better hope the cost of servicing debt raises faster than wages - you can argue that immigration in this sense is helping the HPC

Edited by godsakes

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The difference this time is that we have MASS immigration, which is impacting on wages.

All the complicated stuff about ERM etc.. is irrelevent other than interest rates, which control how much people borrow, where held very low for a long period, and let a lot of money into the economy.

In the early 1990s, there was controlled immigration, the workforce was pretty much fixed, other than by natural population growth (children). Just as Housing stock is fixed, human capital was fixed and wages quickly rose, and an inflationary spiral occured which the bank had to stop with sharp rate rises. The effects of the money inflation worked through the system for 2 more years, which kept rates high. People could afford houses from 93, and thier was a great boom in capital productivity shortly afterwards.

It is different this time, because the government, largely by stealth and deceit, has been using truely massive numbers of immigrates to enter the workforce, while massive amounts of cash also drive up asset prices. Wages cannot catch up for most people.

In many ways Ireland entered the ERM years ago, has interest rates way too low for its economy and is dependant on immigration to drive down wages and sustain a huge boom. Unless you believe that millions and millions of people who have arrived here, are just going to leave the UK (which will not happen), people are pretty much priced out forever, and as people on this site keep saying - renting from a (tax advantaged investor) will always be cheaper than buying.

As a poster on another thread mentioned this morning Germany also has immigration but no HPI.

What he forgot to mention was that Germany has had a falling population for some time, even with immigration added to the total.

The UK, on the other hand, has had an annual net increase in population whilst at the same time tightening both planning and building controls. :lol:

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  • 301 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
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      • up 5%



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