Every housing market downturn is unique but there are consistent themes across them all. Therefore, it is useful to understand what happened during previous downturns when trying to assess the risks to the current housing market and what might happen in the event of a new downturn (as we are almost certainly experiencing right now). This analysis is based on updated research originally prepared for Shelter in 2017.
There have been four market downturns during the last fifty years where real house prices (calculated using RPI long run series) have fallen significantly. They were in 1973-77, 1979-82, 1989-95, and 2007-13. We are currently in the midst of the fifth though it is still not clear how severe it will be.
There are several other occasions when real house price growth turned negative but these have not been included in the analysis as total real house price falls never exceeded 5%. In the years prior to the pandemic, the Nationwide index reports house prices fell 5% in real terms (from Q3 2016 to Q4 2019). However, the fall is not quite as big as the one reported by the ONS index (-3% peak to trough). This difference may reflect the slowdown in London and the south rather than a national downturn given the potential for bias towards these markets in the Nationwide index. Therefore it is not included in this analysis.
The first two housing market downturns investigated in this analysis are unique in that although there were falls in real house prices, nominal prices continued to rise. The 1973-77 downturn followed a 2.5-year boom period where real prices rose by 63%. The downturn then resulted in real price falls of 30% over 14 quarters while nominal prices rose by 30%. Real prices began to rise again in late 1977 but prices never quite reached their previous peak before the next downturn hit.
Real house prices had risen by 33% between the 1977 market trough and the subsequent peak in 1979. The 1979-82 downturn then hit with real price falls of 17% and nominal price rises of 12%. Real house prices fell for 10 quarters and the market returned to its previous peak in 1985.
House prices continued growing through the 1980s, rising by 79% in real terms from the 1982 trough to the next market peak in 1989. When the 1989-95 downturn hit, real house prices initially fell by 34% over 3.5 years while nominal prices fell by 20%. House prices then grew slightly in 1993 but real prices then continued to fall and finally hit a low in 1995, 37% below their 1989 peak. Real house prices eventually reached their previous 1989 peak in 2002 (or 1997 according to the ONS index).
House prices rose rapidly during the late 1990s and 2000s, rising by 162% in real terms from the trough in 1995 to the peak in 2007. House prices then fell sharply during the early stages of the 2007-13 downturn, falling by 20% in real terms and 19% in nominal terms over six quarters. There was a partial recovery in late 2009/early 2010 but real prices then continued to fall in the second half of 2010. Real prices eventually hit a low in early 2013, 26% below the 2007 peak. At the end of 2019 real house prices were still 17% below their 2007 peak (12% below according to the ONS index).
The rest of this analysis will look at the most important characteristics of each of the four housing market downturns. Any additional charts referred to in the following sections are included on the page of charts.
The work of the late Dr. Alan Holmans was immensely helpful in writing this analysis. In particular, his 2005 papers “Housing and Housing Policy in England 1975-2002” and “The Context for Housing Policy Since 1975 Statistical Time Series With Commentary”. The Bank of England’s 'A millennium of macroeconomic data’ was also a very useful resource.