The Nationwide house price index for December was 18% below the peak reached in October 2007. The chart updates a comparison of the current decline with the house price busts in the early 1990s and mid 1970s. (The Halifax index does not extend back to the 1970s.)
The projections assume that 1) inflation-adjusted house prices follow the same path from their peak as in the 1990s or 1970s and 2) retail prices move in line with consensus expectations, derived from the Treasury’s monthly survey of forecasters. The last actual number in the chart is an estimate for the first quarter assuming a further 1% fall in prices from their December level.
The current decline continues to track the 1990s bust closely. An exact replication would involve a further 15% fall in prices from their December level to a trough in the first quarter of 2011. The slightly milder 1970s bust would imply an 11% decline to a low one quarter later.
Cuts in interest rates were constrained in the 1970s and 1990s by high inflation and ERM membership respectively. On the other hand, mortgage credit availability may have deteriorated to a greater extent in the current cycle – although inflation-adjusted mortgage lending contracted significantly in the 1970s. I intend to revisit a comparison of valuations in a future post.
