The housing Market in the UK has been characterised by boom and bust cycles in prices. The average house price in the UK is now approaching £200,000. In the long term house prices have consistently risen above the rate of inflation.

Key Moments in the UK Housing Market.

The Lawson Boom of the 1980s.

The Lawson boom of the 1980s was characterised by rising economic growth, falling unemployment, rising incomes and high levels of consumer confidence, especially amongst the new ‘yuppie’ generation focused in London and the South East.

With interest rates relatively low, there was an unprecedented boom in house price. In one year alone, 1989, house prices in London rose 35%, as people rushed to get on the property ladder and try and benefit from rising asset prices.

The Housing Bubble Bursts 1991-92.

However, the Lawson boom of the late 1980s, caused house prices to rise far faster than incomes leading to declining affordability. However, the real problem for the housing market in the early 1990s was that the government were forced to increase interest rates. The economic boom caused inflation to rise to 11%. Therefore, the government joined the ERM to try and reduce inflationary pressures. To maintain the value of the Pound the government were forced to keep interest rates very high; for many months they were in double figures. These high interest rates hit the housing market as many people who had recently taken out a mortgage were faced with rising mortgage interest payments. Many could not afford their mortgages now that interest rates had doubled and home repossessions soared.  This and the recession caused the housing market to collapse with house prices falling by about 15% in 1992. It took 4 years before the housing market recovered.

After the recover of house prices in 1995, the housing market once again took off. The reason was that this time interest rates were kept low by the new monetary regime which included an independent Bank of England (made independent in 1997). WIth low interest rates people were encouraged to buy and try and get on the property ladder. This caused another boom in house prices which lasted until mid 2007. The reasons for the boom in house prices was:

• Low Interest rates
• Shortage of Supply
• New types of mortgages making it possible for people to borrow more than ever before.
• Strong cultural attachment to owning a house, which caused people to borrow from parents to try and get on property ladder. This was why the house price to income ratio increased above the long term average.

End of the 2000s Housing Boom.

In mid 2007, the housing market suffered a turn around, prompted by the American sub prime crisis.  The subprime crisis in America caused mortgage funds to dry up and therefore even British banks struggled to gain sufficient finance to be able to offer loans. With falling mortgage approvals and declining affordability demand for houses and therefore prices fell.

See also:

• History of the Housing Market