The Barber Boom in the two years preceding the 1973-77 housing market downturn had created an economic boom and contributed to rapidly rising house prices. Real house prices increased by 63% during the period. However, a combination of the falling pound sterling (chart), the 1973 oil crisis (chart), a crashing stock market, rising inflation, political uncertainty, and the imposition of the Three-Day Week at the beginning of 1974 led the UK to enter a recession in 1974. The housing market was also affected and real prices fell by 30% between 1973 and 1977.
Building Societies were the largest mortgage lenders during this period. They accounted for over 90% of outstanding secured lending to individuals in 1973. Building Societies’ interest rates were set by the Building Societies Association. Their recommended rate didn’t always match market interest rates and any divergence could have a large effect on the amount of mortgage lending. If Building Societies offered better rates than the market, funds flowed in and lending increased. Alternatively, if market rates offered a better return, available funds dried up and lending fell. This boom-bust cycle can be seen in the years leading up to the crash with the annual net change in outstanding lending peaking in March 1973. Net lending then fell in real terms in 1974 as interest rates rose and a ‘guideline’ scheme was introduced to limit new lending to pre-agreed levels.
Unfortunately, the housing downturn and drying up of financial liquidity affected a number of secondary deposit taking banking institutions. With pressure growing and the imminent collapse of several institutions, the Bank of England stepped in with a ‘lifeboat operation’ to bail out the financial institutions.
The recession, lending famine and falls in real house prices had a large impact on housing market activity. Transactions fell by 39%% between Q1 1973 and Q2 1974 (chart) and private housing completions fell by 30% from 1972 to 1974 (chart). Although the data only starts in 1974, the subsequent recovery suggests both first-time buyers and home-movers were affected by the mortgage famine but home-mover numbers had a faster recovery (chart). The data also suggests that the first-time buyers that had managed to buy had to raise much larger deposits as a proportion of their income, particularly in London (chart). Regional analysis of house price falls shows the downturn was greater in London and the south of England while real prices in Northern Ireland prices fell the least.
The impact of the downturn on existing home-owners was relatively limited. As house prices continued to rise in nominal terms there was minimal risk of negative equity. Unemployment rose from post-war lows to 5.7% in 1977 (chart) but there was only a small increase in properties taken into possession (chart). Although inflation rose rapidly, average wages managed to keep pace during the early part of the downturn (chart) and Government spending on Mortgage Interest Tax Relief tripled during the recession (a 67% increase in real terms). By the end of the downturn, many mortgage holders found themselves with large amounts of equity in their homes thanks to inflation eroding the value of their mortgage.
Local authority housebuilding had fallen in the run-up to the recession (chart). Rent rises were limited by the government policy (chart) and inflation was driving up local authorities’ costs. However, the 1974 elections of first a minority Labour government in February and then slight Labour majority government in October led to renewed focus on local authority housebuilding. Fair Rents for local authority homes were abolished and a subsidy scheme was introduced to fund more local authority housebuilding. There is some evidence that the local authorities took advantage of market conditions to acquire private sector housing stock (chart).
The UK’s economy returned to growth in 1976 with real house prices following in 1977. However, the economy was far from fixed with the Government borrowing $3.9billion from the International Monetary Fund in September 1976. Public spending was cut and pay rises were limited in an effort to control inflation. This led to widespread strikes during the ‘Winter of Discontent’ in 1978/79.