UK House Prices: Return to 'Boom-Bust'?

'Boom-bust' was the phenomenon widely blamed for badly damaging the UK housing market in the 1990s. It has become the by-word for economic mis-management and has been used effectively as a political label in the general election campaigns of 1997 and 2001. What actually happened to the housing market during this time? How did it affect households and is there a prospect of its recurrence?

In the mid to late 1980s UK house prices began to accelerate rapidly, leading many owner-occupiers to believe that what was happening to the value of their property would continue to persist.

Many were persuaded to fuel their spending by borrowing money against the value of their house, as this value was, it seemed, ever-increasing. Many others sold their homes, moving to more expensive property; the increased mortgage borrowing would be more than offset, they thought, by the soaring housing market.

When retail price pressure in the UK reached its peak in 1990, interest rates had to be used to cool the economy down. UK mortgage lenders reacted by hiking their borrowing rates, which passed 14 % in 1989-90.

By now, the brakes on the overall economy were floored and the housing market imploded spectacularly. 20 %-plus house price rises were replaced by price falls within eighteen months.

The fall-out was as destructive as it was widespread. Thousands began to default on their mortgage payments, as the credit supply they had relied upon was turned off. Homeowners forced to sell their properties to repay their borrowing, found that their homes were now worth far less than they owed on their mortgages - the now infamous 'negative equity' problem.

It took until 1996 before steady growth reappeared in the housing market. For many, it had been a painful lesson in market economics. For the then Conservative Government, it spelt the beginning of the end of their grasp on power for at least a decade. Ever since, the Conservatives in power have been stuck with the label of the 'boom-bust' government.

Get the UK house price data 1984-2000 [Excel sheet 14K] to see the changes in house prices.

House prices appear to be very buoyant as the new century begins, but it is important to remember what happened in the '80s and '90s. This experience left scars for many thousands of people. So widespread was the fall-out from the bursting of the house price bubble, that it seemed everyone knew someone who was in financial trouble.

So what are the chances of the same thing happening in the early stages of the '00s? To understand the reality of house prices throughout the period in question, we must account for inflation in any nominal price change data. So we must get hold of RPI data to calculate the approximate 'real' price change.

To transform any nominal data into 'real' data, you must subtract RPI inflation from the nominal statistics.

Get the UK RPI data 1984-2000 [Excel sheet 14K] to see inflation over the same period as the house price changes.

You should now be able to set the inflation data against that for house prices in your spreadsheet. Choose a format to display the combined data.

Now attempt the following questions:

Why not have a look at our solution [Excel sheet 14K]

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