1989-95 Downturn

The Lawson Boom of the 1980s saw strong economic growth and falling interest rates. Real house prices rose by 79% from the trough of the previous market downturn in 1982 to the next peak in 1989. Financial de-regulation led to increased mortgage lending and, along with Right-to-Buy (chart), helped increase home-ownership (chart). Household debt also increased (chart). The 1987 stock market crash was one of the first signs of trouble but interest rates were cut and the economy continued growing. Chancellor Lawson announced the end of the option to pool Mortgage Interest Relief At Source (MIRAS) allowances at the March 1988 Budget. However, the implementation was delayed until August. House prices rose rapidly and housing market transactions spiked in Q3 1988 as buyers rushed to beat the change (chart). Private housebuilding also peaked in 1988 (chart).

The Bank of England’s base rate was cut further in the first half of 1988, reaching a low of 7.375% in May under the assumption that economic growth was slowing. However, economic growth continued and inflation picked up. To tackle rising inflation, base rate was increased rapidly, reaching 12.875% in November 1988 and 14.875% in October 1989. Mortgage rates followed the same pattern and mortgage holders found themselves with rapidly increasing repayments. This trend is highlighted by the repayments for those first-time buyers that continued buying (chart), reaching 30% of gross income in 1990. That figure may have been higher for those who had rushed to beat the MIRAS deadline. As the country entered recession, unemployment began to rise again.

Housing market transactions fell by 56% (chart) and real house prices initially fell by 34% over the first 3.5 years while nominal prices fell by 20%. Although interest rates fell in 1991, the damage had been done. Nominal house price falls led to negative equity. In combination with rising unemployment and stretched mortgage repayments, this led to an increase in arrears on mortgages. Properties taken into possession hit a record high of 75,000 in 1991 (chart). Lending to firms involved in real estate fell negative (chart) and private housebuilding completions fell by 34% (chart).

The Government’s policy response to the crash was initially limited to reductions in interest rates. The first actual government intervention took place in December 1991. This included the direct payment of “Income Support for Mortgage Interest” to lenders. This policy may have reduced the number of homes repossessed, with possessions peaking at 0.8% of loans in 1991 (chart) while arrears continued to rise in 1992. A stamp duty holiday for purchases under £250,000 was also introduced, a price threshold which covered the majority of the market.

The 1992 general election saw the re-election of the Conservative party, this time led by John Major. A “housing market package” was produced in November. This provided increased funding for housing association development programmes. Housing associations bought stock from developers, stock on the open market, and repossessed stock from lenders (chart). Housing associations exceeded their target but there are suggestions some may have struggled with management, given the scale and location of their new acquisitions. Unfortunately, house prices continued to fall and eventually reached a low in 1995, 37% below the 1989 house price peak in real terms.

The private rented sector had been transformed by the Housing Act 1988. The Act replaced regulated tenancies with “assured tenancies” and “assured shorthold tenancies”. The proportion of households living in the private rented sector hit a low in 1992 (chart). Private rents rose by 28% in real terms during the recession but the data is limited (chart). Housing association rents rose by a similar amount over the same period.

The Housing Act 1988 also allowed housing associations to borrow from private lenders (chart). This made delivering social housing via housing associations less costly in terms of public spending than delivering it via local authorities. Local authority’s housing revenue accounts were also “ring-fenced” by the Local Government & Housing Act 1989 and changes to subsidy calculations were made. Local authority rents rose by 43% and their housebuilding activity fell to negligible levels (chart). A number of local authorities also transferred their stock to housing associations (40 by March 1995). 

An important feature of the 1989-95 downturn was its geographical distribution. The largest house price falls were found in London and the south of England. However, these regions had experienced a much stronger housing boom during the 1980s. By the end of the recession, most regions and home nations had seen a broadly similar net change in house prices since the start of the boom.