House price crashes are rarer than you think!

by Cliff D'Arcy on 07 September 2010  |  25 comments
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What goes up, must come down. Yet since the Fifties, house-price crashes have been surprisingly infrequent...

The recent house-price crash has left scars on many of the UK’s 17½ million homeowners.

After 12 years of rising prices between 1995 and 2007, many property gurus wrongly assumed that prices could only ever go up. However, the pin to burst this housing bubble arrived in the form of the credit crunch. The subsequent banking collapse, together with the deepest recession since the Thirties, sent house prices spiralling downwards.

After falling for more than 18 months, house prices pulled out of their slump and began rising again in the spring of 2009. However, the latest surveys indicate that the housing market is again faltering, raising the risk of a double-dip for house prices.

Housing crashes hardly ever happen

Thanks to the 2007-09 crash, the real risk of further house-price falls is firmly back in the public consciousness. Then again, history shows that declining house prices are, in fact, a fairly rare event -- in the post-war era, at least.

To find out what history tells us about the frequency and severity of house-price falls across the UK, let’s dig into the Halifax House Price Index (HPI) data, which go back to 1983:

Halifax House Price Index, 1983-2009

(All homes; seasonally adjusted)

According to the UK’s biggest mortgage lender, house prices have declined nationally in only five years since 1983, most recently in 2008.

Although prices fell in four years in the early Nineties, this crash was nowhere near as steep or spectacular as the fallout from the credit crunch. Indeed, 2008 stands out in modern history as by far the worst year for house prices -- and the only double-digit yearly decline recorded by Halifax.

Thus, over the 26 years monitored by Halifax, house prices have risen 21 times -- a ‘success’ rate of 21/26, or 80.8%. In other words, yearly declines in house prices are a relatively infrequent event, happening on average only twice a decade.

Let’s go back to the Fifties

By turning to the Nationwide BS index, we can reach back into the Fifties for a better picture of the long-term trend in house prices, as my second table shows:

Nationwide BS House Price Index, 1952-2009

As you can see, after two slight falls in the early Fifties, house prices rose steadily from 1955 to 1989 -- an incredible 35-year streak. Then came the 1990-95 slide, followed by the bubble which finally popped in 2007.

According to Nationwide’s data, UK house prices have fallen just seven times in 57 years. With house prices rising 50 times out of 57, this gives a ‘success’ rate of 87.7% -- even higher than the 80.8% obtained from the Halifax data.

History can be a false friend

We’ve found that, on average, house prices drop in one or two years per decade, which is a very strong positive trend. Thus, anyone prepared to play a long game and ride out the occasional downturns should make money from property. Then again, if you get into trouble in the bad years, the gains of the good years can be wiped out, for example, by repossession.

For the record, Halifax’s data since 1983 generate average yearly growth of 6.6% in house prices. Since 1952, Nationwide has recorded average growth of 8.1%. However, were we to adjust for the very high inflation of the Seventies, these two figures would be much closer together.

Over long periods, when house prices rise faster than their long-term average, this increases the likelihood of ‘reversion to the mean’ -- in other words, a crash. Therefore, sustained future rises of more than, say, 6% to 7% a year would suggest further busts to come.

Finally, I would warn against getting too confident with these historical figures, because history can sometimes be a poor guide to the future. Following huge innovations in mortgage lending introduced in the Nineties and Noughties, the lending market-- and therefore the housing market -- led to reckless, risky loans.

Thus, now we’re back to sensible lending and national austerity measures, it could be many years before house prices start to boom again...

More:  Biggest drop in house prices since April 2009 | Bad news for landlords

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