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Between 1982 and 1988 house prices experienced significant growth as the high demand for houses from the post-war baby boomers combined with a doubling of money supply the easy availability of credit. A catalyst for the house price crash was introduced in March 1988 when Nigel Lawson, the Chancellor of the Exchequer, announced an end to “double mortgage tax relief” in which both halves of an unmarried couple could claim tax relief on mortgage interest. As a result of this decision, between March and 1st August 1988, the day double tax relief came to an end, house prices went through the roof as people teamed up together to buy ahead of the Chancellor’s cut-off date.
The instant the cut-off point passed the housing market came to a standstill as the appetite of buyers evaporated. Viewings were non-existent, offers to buy were withdrawn and prices stagnated. The absence of buyers weakened the market, forcing sellers to lower the prices in order to attract any interest.
Alongside these events the interest rate increased gradually from 7.38% in May 1988 to a high of 14.88% by October 1989 where it remained for the best part of a year. The doubling of interest rates over a relatively short period of time led to a contraction in credit which significantly undermined elevated property prices. By the end of 1989 house prices had started to reverse, falling 38% in real terms over the next 5 years.
The market crashed partly because of the increase in mortgage costs for existing owners, but also because prices were no longer affordable to buyers at the higher interest rates. Thus prices fell to meet the lower level of funding available to buyers.
By way of comparison, the Bank of England base rate has risen from a low of 3.5% in 2003 to 5.75% at the time of writing (July 2007). This is an increase of 64%, which will put significant pressure on house prices in a similar way within the current cycle.
