Part 4 of a 5-part Series: What Have Past Inflation Crises Taught Us About Investing?
By James Pearcy-Caldwell, Aisa Co-Founder and Compliance Officer, and Chris Lean, Chief Investment Officer
House prices have been affected by policymakers and economic factors throughout history. In this discussion, we track the UK housing market since 1970 to illustrate how these factors affect consumers’ bottom lines.
1970: Average UK house price £ 4,057
Around 1/3 of the population is living in social housing provided by local authorities, which is an alternative to private home ownership.
1980: £ 20,268
Introduction of housing act (1980) – “right to buy” for tenants with turbo-charged discounts results in councils having less money to keep, therefore their ability to build new houses is crippled.
1983: £ 24,522
1985: £ 29,143
Under the initiative (from 1980) about 500,000 council homes are sold.
1986: £ 33,103
Throughout the 1980s there is deregulation in the financial sector. Subsequently, mortgages readily available, and lenders can charge whatever they want.
1987: £ 38,662
1988: £ 49,319
Another housing act is implemented, enabling Householding Associations (HA) to source private money. For this reason, people start transferring to HA.
1989: £ 58,887
Interest rate rises to almost 15 % and the economy is in recession.
1990: £ 58,162
1990s’ subsequent fall, combined with high interest rates, leaves many homeowners with “negative equity”. This occurs when the value of real estate property falls below the outstanding balance on the mortgage used to purchase that property.
1992: £ 55,053
Easily available mortgages lead to high demand for houses. However, there is a lack of supply due to the low number of new houses. Both factors drive up house prices.
1993: £ 54,121
From this year, prices begin to rise. For example, mortgage payments go from 1/5 of first-time buyer pay packet/wage to 1/3 within 10 years.
1994: £ 55,559
1995: £ 55,939
1996: £ 57,986
Association of Residential lending agents and four lenders launch a “buy-to-let initiative” making it easier to invest in properties. This, falling interest rates, and rising house prices persuades investors that the property market is a good place to invest for the next two decades. Consequently, this adds to rising prices.
1997: £ 63,085
1998: £ 70,313
1999: £ 77,961
A new type of high-risk mortgage is introduced. Now, borrowers can take on debt equal to 125% of the value of the property
2001: £ 96,892
2003: £ 130,164
2005: £ 145,609 – £ 153,236
Politicians are concerned over loans that do not verify the borrower’s incomes. Subsequently, new rules are made, as these kinds of loans are risky.
2007: £ 185,196
US Lehman Brothers files for bankruptcy and starts the global financial crash. Accordingly, UK lenders take risky products off the market and significantly cut their prices. This leads to mortgages being difficult to get, which pushes people into private renting.
2007-2008: £ 176,853
Credit crunch is felt across the country. However, repossessions are kept in check due to low interest rates and additional rules forcing lenders to do their best to help people keep their homes. Significantly, this made it possible for investors with spare cash to invest in property with “cheap credit”.
2009: £ 161,148
2010: £ 170,365
A growing population, together with a low number of new houses built, leads to high demand for housing.
Government announces “affordable rent”. This makes tenants pay up to 80% of the market rent (far above social housing rates), enabling more new house building. However, low-income earners struggle with high rent prices.
2013: £ 172,890
Launch of two “help to buy” schemes. In contrast, one independent budget economist warns that this will push prices up but will have no impact on demand.
2012: £ 168,556
2014: £ 186,770
2015: £ 197,890
George Osborne introduces some tax changes on landlords:
- Tax relief is cut from 45% to 20% by 2017.
- There is no longer automatic relief worth 10% of the rent for wear and tear.
- Additionally, a 3% surcharge on second homes is implemented.
2016: £ 211,725
2018 -2019: £ 228,354
Theresa May gets rid of council’s cap on borrowing, resulting in house building capabilities.
2019: £ 230,612
2020: £ 238,211
COVID aftereffects.
Using Average House Prices and comparing them to HPI 2015 is explained below (1)
Data seems to be valid if compared to OECD HPI index with base in year 2015.
To put it in economic context, the next chart shows Consumer Price Index (inflation) and Long-term interest rates:
1. UK housing crisis: how did owning a home become unaffordable?
Image by Freepik
See also:
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