# Housing crash in the UK in the 80's.



## mell61 (26 Apr 2006)

A friend who lived in the UK during the crash in the late '80s maintains that from her perspective the 'tipping point' was when the first time buyers were priced out of the market, so the 1st time sellers had no-one to sell to, creating a domino effect through the market...

Has anyone a more definitive explanation of what took place during the '80s in the UK, as I would be interested in discussing a 'compare / contrast' (memories of the Leaving suddenly arise) of the situation then with our closest neighbour and our current property situation in Ireland.

I had a quick look around and haven't found anyone discussing the UK housing crash, and I would be interested in peoples ideas of why it will / won't happen here.


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## ClubMan (26 Apr 2006)

Is this any use?

I heard it mentioned somewhere recently that _Ireland _has the lowest average age for first time property buyers which might indicate that things are not as bleak as some people might assume?

In terms of the _Irish _property market this article might also be of interest.


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## Squonk (26 Apr 2006)

Does this mean that if there's a crash here, then prices will only fall back to a level where first time buyers can get back into the market? If so, prices won't go below, say, today's values ???


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## bearishbull (26 Apr 2006)

ClubMan said:
			
		

> I heard it mentioned somewhere recently that _Ireland _has the lowest average age for first time property buyers which might indicate that things are not as bleak as some people might assume?


the fact we have the youngest FTB's may indicate a panic to "get on the ladder" as "prices will only go higher if i wait to buy later". I wouldnt see it as a particularly positive thing in todays market .


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## z107 (26 Apr 2006)

> If so, prices won't go below, say, today's values ???


I'd doubt there'd be any logic as to where the downward spiral will stop, just as there isn't any logic to the upward one we're currently experiencing.

The broom cupboard in Nightsbridge (I think) seemed to be around the peak.


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## Duplex (26 Apr 2006)

Squonk said:
			
		

> Does this mean that if there's a crash here, then prices will only fall back to a level where first time buyers can get back into the market? If so, prices won't go below, say, today's values ???


 
What you are asking Squonk is what is the support level for the Irish housing market in the event of a crash.  It may be the case that prices would revert to the long term mean; as measured in terms of house price to income levels or rental yields.   Property Bulls would argue that prices have reached a new permanently high plateau and that we will see a soft landing where inflation in prices slows to a pace that matches general incomes inflation.  But neither the crash or the soft landing appear to be on the horizon as yet.


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## mell61 (26 Apr 2006)

ClubMan, that link discussing the UK property market was very interesting, one factor that is mentioned is that in the UK there was an increase in the repossession rate of houses by financial institutes.   
I recall (vaguely) a discussion that mentioned that repossession in Ireland rarely takes place due to the Constitutional status of the family home, no judge wants to be seen putting a family out on the street.
Would anyone think that, if this is a bubble we are currently in, and it falters/slows down/crashes (delete as appropriate), we would see repossession become a fact of life?


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## conor_mc (26 Apr 2006)

Squonk said:
			
		

> Does this mean that if there's a crash here, then prices will only fall back to a level where first time buyers can get back into the market? If so, prices won't go below, say, today's values ???


 
Don't underestimate the herd mentality. Just as it can power house prices upwards, it can also drag them well below what can be considered a fair price.

After all, who wants to take a chance and buy a house only to see it well into negative equity a year later? Most would be inclined to wait until the market is positively heading north again before taking a chance.


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## ClubMan (26 Apr 2006)

bearishbull said:
			
		

> the fact we have the youngest FTB's may indicate a panic to "get on the ladder" as "prices will only go higher if i wait to buy later". I wouldnt see it as a particularly positive thing in todays market .


 What I meant was that for all the talk of _FTBs _supposedly being squeezed out of the market it seems that many of them still manage to get in. Obviously if some are not being prudent about the amount of debt that they incur in doing so that may be a "bad thing" (for them at least) but that's their risk to take.


			
				conor_mc said:
			
		

> After all, who wants to take a chance and buy a house only to see it well into negative equity a year later?


The person who has found their ideal property, can afford the mortgage repayments and is not worried about selling in the short/medium term?


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## Howitzer (26 Apr 2006)

ClubMan said:
			
		

> I heard it mentioned somewhere recently that _Ireland _has the lowest average age for first time property buyers which might indicate that things are not as bleak as some people might assume?


 
I mentioned the age thing in a number of threads but I would agree with this arising out of a final panic of buyers. Long term this is actually a really bad thing for the market. The baby boom bubble in the population reached it's peak a couple of years ago. If you believe that in a sustainable market a certain amount of new buyers are required each year, the fact that the average age is still decreasing probably means that the market is effectively "borrowing" buyers who should really be buying in the next 5 years. Together with the baby boom peak having been reached this would mean a decrease in the number of potential buyers in the years ahead.

That was a really bad explanation, if anyone understands what I'm saying and can translate into proper english feel free.


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## conor_mc (26 Apr 2006)

Howitzer said:
			
		

> I mentioned the age thing in a number of threads but I would agree with this arising out of a final panic of buyers. Long term this is actually a really bad thing for the market. The baby boom bubble in the population reached it's peak a couple of years ago. If you believe that in a sustainable market a certain amount of new buyers are required each year, the fact that the average age is still decreasing probably means that the market is effectively "borrowing" buyers who should really be buying in the next 5 years. Together with the baby boom peak having been reached this would mean a decrease in the number of potential buyers in the years ahead.
> 
> That was a really bad explanation, if anyone understands what I'm saying and can translate into proper english feel free.


 
No worries, that makes perfect sense to me.



> The person who has found their ideal property, can afford the mortgage repayments and is not worried about selling in the short/medium term?


 
Okay, you got me ClubMan. It was a rhetorical question about human nature though, rather than individuals who buck the trend.

The opposite of what you suggest though is the person who buys now in fear of never getting on the property ladder, who can't really afford it so they borrow deposits from parents, the Credit Union, take out 100% mortages, etc. and who see their squishy little 2-bed apartment as a "starter home"..... sound familiar?


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## mell61 (26 Apr 2006)

I understand what you mean Howitzer.
Another area not really being considered is that in pulling in the normal buyers from the next 3-5 years into property, doesn't it in turn reduce the spending capabilities of that sector.   
Instead of renting for €300-400 with a few others, living it up with holidays, nights out, new cars, they are instead committed to €1000-2000 per month, and the 'rent a room' doesn't really cut into that commitment as much as it would appear!    
So either they are still going to live it up, and increase their debt potentially putting the property at risk, or they just stop spending, so our economy is being impacted from the loss of that income.   Either way there are knock on effect across the economy.


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## ClubMan (26 Apr 2006)

conor_mc said:
			
		

> The opposite of what you suggest though is the person who buys now in fear of never getting on the property ladder, who can't really afford it so they borrow deposits from parents, the Credit Union, take out 100% mortages, etc. and who see their squishy little 2-bed apartment as a "starter home"..... sound familiar?


Nobody I know personally as it happens.


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## mell61 (26 Apr 2006)

but for many of us  it sounds like everyone we know / work with, ranging from 21-35 years old!


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## tyoung (26 Apr 2006)

The key to the UK property bust in the late 80's was interest rates. Back then The Bank of England was not independent and interest rates were decided by the Channcellor. In general interest rates were kept low prior to an election and then bumped up afterwards to control the boom.  Such a boom had occured in the late 80's. However this was not enough.
In the late 80's Nigel lawson changed monetary policy. He decided to focus on the exchange rate  and so interest rates were adjusted so that the pound would shadow the old German mark. The idea was that as GB became a low inflation country it would have similarly low interest rates to Germany.
Unfortunately after reunification, for political reasons Germany allowed East Germans to exchange their east german marks for western marks. They went on a massive consumer binge which forced the Bundesbank to raise interest rates dramatically.  Gb followed,interest rates went up and up and the property market collapsed. The speculators saw it was politically unteneable  and sold the pound short.
 On Black Monday the game was up. GB dropped out of the ERM, the pound dropped dramatically  and of course George Soros made a billion pounds in a day!
 The thing is that the speculators saved the property market in the UK. Interest rates also fell sharply. I think it would have been much worse if GB had stayed in the ERM.
Interest rates are also the key to the Irish Market. Anybody dreaming of a nightmare scenario should start with a break up of the Euro and Irish interest rates being forced up very sharply.


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## Duplex (26 Apr 2006)

> Anybody dreaming of a nightmare scenario should start with a break up of the Euro and Irish interest rates being forced up very sharply.


 
That would be a humdinger alright


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## delgirl (26 Apr 2006)

tyoung said:
			
		

> The key to the UK property bust in the late 80's was interest rates.


This plus the dual mortgage tax relief, which caused frenzied buying and temporarily inflated house prices.

We bought in London in 1988 for £96,000 - 3 years later the property was worth £65,000.  Interest rates rose from 7% up to 16% with many buyers trapped with negative equity and unable to meet the mortgage repayments.  

We were lucky enough to be on good salaries and had only 1/3 mortgage in the UK and the other 2/3 in Switzerland, where the interest rate remained at 3% throughout this period.


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## Duplex (26 Apr 2006)

Real interest rates in the UK over the past twenty years.

[broken link removed]


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## Neffa (26 Apr 2006)

tyoung said:
			
		

> The key to the UK property bust in the late 80's was interest rates. Back then The Bank of England was not independent and interest rates were decided by the Channcellor. In general interest rates were kept low prior to an election and then bumped up afterwards to control the boom. Such a boom had occured in the late 80's. However this was not enough.
> In the late 80's Nigel lawson changed monetary policy. He decided to focus on the exchange rate and so interest rates were adjusted so that the pound would shadow the old German mark. The idea was that as GB became a low inflation country it would have similarly low interest rates to Germany.
> Unfortunately after reunification, for political reasons Germany allowed East Germans to exchange their east german marks for western marks. They went on a massive consumer binge which forced the Bundesbank to raise interest rates dramatically. Gb followed,interest rates went up and up and the property market collapsed. The speculators saw it was politically unteneable and sold the pound short.
> On Black Monday the game was up. GB dropped out of the ERM, the pound dropped dramatically and of course George Soros made a billion pounds in a day!
> ...


 
You're right about interest rates rising causing the problems in Britain, but it wasn't just the rates. It was also the case that prior to that (in an interest rate environment which was far from low) people were in a similar property buying frenzy to they are here in Ireland now. Prices rose to the point where the affordability indices went to the wall due to the high prices *and* then interest rates rose, so the crash happened - buyers dried up and many homebuyers were stuck with negative equity for a long time. And also the banks moved in quite quickly and did a lot of reposessions which freaked potential buyers out. People didn't want to touch property investment for almost a decade afterwards. We bought in London 9 years after the crash and several of my friends still thought we were mad.


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