This is a short history of the UK Housing Market during the late 1980s and Housing Crash of the early 1990s. It is useful to understand the reasons for this crash in predicting whether a future crash will occur.

The last real UK housing market crash occurred in 1991. After a period of rapidly rising house prices, the market turned and in the space of 12 months, prices fell by 15%. In some areas the house price falls were even greater.

House prices shot up in the Lawson boom of the 1980s. It was an era of rising confidence; there was a new breed of young homeowners, (sometimes called the Yuppie (young upwardly mobile person, independent economically – or something like that). The booming housing market was fostered by a period of income tax cuts and low real interest rates. In particular interest rates were kept low after the 1987, stock market crash. The government were concerned the falling stock market could harm growth so they cut interest rates encouraging people to spend. Also the chancellor Nigel Lawson was committed to an unofficial tracking of the DM. It was an unofficial version of the Exchange Rate mechanism. This involved keeping the pound fixed at a certain level against the DM. However, because the pound was relatively strong, this encouraged the chancellor to keep interest rates low and prevent a further appreciation of the Pound. The impact on the housing market was that the low interest rates encouraged people to take out mortgages and buy houses. It was also a period where buying a house was in vogue. Mrs Thatcher herself, wanted to promote a home-owning democracy. Council houses were sold off to former tenants. Therefore, in some areas the late 1980s saw house prices rise by upto 30% in one year. This also encouraged an amount of speculation – people buying to make property gains.

The housing boom occurred simultaneously with a boom in the economy. The UK saw unprecedented levels of economic growth (5%). People, especially the Conservative party, talked of a new ‘economic paradigm’ – an economic miracle which had increased the long run trend rate of growth. See the Lawson Boom However, the fast rate of growth was causing inflation to rise. At one point inflation reached 11%. Therefore, the government felt it needed to target and reduce inflation. This persuaded Mrs Thatcher that the UK should join the Exchange Rate Mechanism. It was hoped the discipline of a fixed exchange rate would help reduce inflation. Joining the ERM did help reduce inflation, but at the cost of a deep recession. To maintain the value of the pound the government was forced to increase interest rates to 15%. Naturally, these interest rates of 15% were very damaging for the housing market. Many people who took out mortgages at the height of the boom now found they could no longer afford the repayments. In addition rising unemployment also contributed to record levels of mortgage defaults. Therefore, the housing market was completely changed; the optimism of the late 1980s vanished and it became a sellers market, with a glut of properties on the market. The housing crash was felt particularly in London and the South East.

See also: Housing Boom and Bust