Housing booms and busts since 1975

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The housing market is not only a bit of a national obsession, but a big driver of the UK economy. And when many people earn as much from their house price rising as they do from their jobs, is it any wonder?

Of course, house prices don't only go up, and when they crash it can have serious implications for a lot of people (as we'll go into later on).

Interest rates affect house prices. The relationship is complicated, but generally, when the cost of borrowing goes up, more people are forced to sell their homes, and the market crashes.

I wanted to look at some of the crashes in a bit more detail. What caused them? What was the impact? What role did interest rates play? And what can we learn from them?

Interest rates have gone from a high of 17% in the 70s, to a steady four to five percent in the 90s and 00s, to a record low 0.1% during Covid-19 (and there was mention of negative interest rates). Since 2022, interest rates have rapidly risen to tame inflation (as of writing they are at 5.25%).

We've made this article interactive, so you can get the most from the data. Feel free to play with the charts or skip straight down to our analysis – whatever works for you. 

This article will also be continually updated every quarter.

Ready to dive in?

Alright. Let’s start by going back a few decades.

1. The Economic Cycle – 1968 to Now

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The property market has had a few ups and downs since 1968. Hell, you probably lived/worked through most of them.  

(The article headline says "since 1975" – but when we updated this story, we found a bunch of data going back a bit further, providing more insight. We kept "1975" to keep it consistent and all in the same place).

Let's dive in and see what happened.

(If you'd just like to find out what the key impact to developers was, skip to here.)

Let’s look at the three big economic events on that chart. 

• 1979 – Thatcher Combating Inflation

Context: Just before Thatcher came into power, inflation reached a high of 25%. (For comparison, in January 2020 inflation stood at 1.8%.)

The incoming PM sought to reduce inflation by raising the interest rate to a staggering 17% (that’s 170x higher than the rate introduced in March 2020).

Impact: Inflation fell, as intended, but house prices suffered in the resulting recession. 

Sky-high interest rates meant sky-high mortgage repayments, and many simply couldn’t keep up. That meant repossessions, forced sales, and a sudden influx of properties forcing down prices.

However, prices picked up starting in 1982, rising from £26,871 to £56,352¹ in real terms² (1988 prices³).

• 1992 – Black Wednesday

Context: On 16 September 1992 John Major was forced to withdraw the pound from the European Exchange Rate Mechanism (ERM), due to a collapse in pound sterling. The government increased interest rates to invite speculators and to try prevent further price drops, but it didn’t work (and it cost the UK Treasury over £3 billion).

Impact: Black Wednesday was a significant economic shock, but the impact on house prices was pretty minimal. 

Why? Well as you can see, house prices had already plummeted from their high in 1989, caused again by high interest rates.

Then what followed was one of the biggest housing booms in English history. That is, until a certain financial crisis.

• 2007 – Global Financial Crisis

Context: The global financial crisis started with the burst of the subprime mortgage market bubble in the US in mid 2007. 

But, as the last big housing crisis, we'll dive a little bit more into the details in the next section.

Key Takeaways for Developers

• Thatcher raising interest rates collapsed the home ownership market almost overnight. Many small developers went out of business. Larger players were able to buy up assets, and attain a strong position for decades to come.
• Interest rates remained high until after Black Wednesday, after which the rates fell and mortgages became affordable again. That meant more people could afford to buy, and could afford to pay more for the houses, pushing up prices (and creating a big opportunity for developers). 
• And then the 2007-2008 crash happened, which had big implications for everyone...

2. The Run Up to the Financial Crisis – 1998-2008

OK, so we know that between the mid 90s and 2008 things were going well, but just how well?

(To skip straight to find out how this period affected developers, click here.)

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• Gordon Brown Gives Control of Interest Rates to an Independent Bank of England

Context: On 7 May 1997, the new Chancellor of the Exchequer (and later Prime Minister) Gordon Brown gave control of interest rates to an independent Bank of England, instead of keeping with the Government. 

He set up a Monetary Policy Committee to control rates, with an aim of keeping inflation at 2.5% or less. 

Impact: Interest rates rose from 6.75% to 7.5% over the next year, before sharply declining to 5.25% between 30 September 1998 and June 1999. 

Interest rates were kept between 3.5% and 6% over the next decade to keep inflation in check.

• The 00s Boom

Context: During New Labour’s tenure the housing industry experienced a boom. House prices rocketed (thanks in no small part to those lower interest rates). 

Impact: House prices more than double from £42,466 in 1997 when Tony Blair takes power to peak at £107,361 in September 2007⁴ in real terms² (1988 prices). The money spent constructing new homes nearly trebles in the same period –  from £12.7 billion to £30.8 billion in real terms⁵ (2015 prices).

• The Collapse of Lehman Brothers

Context: But then, everything changed. It’s hard to pin the exact date of the global financial crash but it started with the subprime mortgage bubble, with lots of homeowners defaulting on what were meant to be fairly secure loans. This meant banks were increasingly hesitant about lending to each other, which further choked up the financial system. 

But one big date we can track – September 15 2008. On this day the Federal Reserve declined to guarantee Lehman Brothers loans. The 158-year-old bank filed for bankruptcy, the largest filing in US history.

Impact: Global markets plummeted. Construction had already been slowing down in the UK, but Lehman’s collapse really put the brakes on, from £24.9 billion on new homes to £18.1 billion a year later in real terms (2015 prices)⁶. Interest rates dropped from 5% to 0.5% in the same period. 

It will take nine years for house prices (in real terms) to recover to the price they were when Lehman collapsed.

Key Takeaways for Developers

• Interest rates vary after Brown hands over control of them to the Bank of England. Despite this variance, house prices more than doubled in the run up to 2007. 
• The financial crash impacted the entire housing market. Tougher lending criteria meant fewer people could secure mortgages to buy houses. Leading to less demand for new housing. Many developers were affected too, also finding it tougher to access credit to fund projects.

3. Financial Crisis – The Aftermath

While the causes of that recession may have been unique, is there anything we can learn from it to prepare us for the future?

(Only want to find out how the crash affected developers? Skip to that section here.)

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• Historically-Low Interest Rates

Context: After the financial crisis, interest rates were cut to 0.5%, the lowest in the Bank's history. This was part of a range of measures to help stimulate the economy. 

Impact: We can see that interest rates dropped like a stone and have never recovered since. This meant the cost of borrowing was significantly lower. Gone are the days of 16-17% mortgage rates of the 80s, instead most borrowers would be looking at around 3-4%. This means people can borrow more at the same cost, and that in turn has pushed house prices higher...

• House Prices and First-Time Buyers

Context: During the financial crisis, house prices fell. Credit became more difficult to access, making it harder for most people to get a mortgage. Mortgages to first-time buyers dropped from £14.4 billion in March 2007 to £4.2 billion⁷ in March 2009 in real terms² (2015 prices). 

Impact: The Help To Buy scheme was introduced in March 2013 to help first-timers, and was effective. Increasing spending from £10.1 billion, at the inception of the scheme to peaking at £21.7 billion⁸ in real terms (2015 prices). This is above pre-financial crash 2007 levels. 

The scheme has received criticism for perhaps inflating the housing market. Combining those low interest rates with a government-backed lending scheme means first-time buyers can afford to borrow more money at the same cost. So they did, driving up demand on the first-time-buyer-scheme-approved properties.

During Help to Buy's tenure (March 2013 to March 2023), average house prices (in real terms) went from £87,347 to £107,940⁹ – a seemingly impressive 24% increase.

However, compared to the boom years of 1982 to 1989 (109%) and the 00s boom of 152%, it is less impressive. House prices have been relatively flat during Help to Buy.

• Buy-To-Let

Context: Buy-to-let mortgages suffered after the crash, but not as much as first-time mortgages. They dropped by about 80% from March 2007 to March 2009, while mortgages to first-time buyers dropped by about 70% in the same period. 

In the coming years, the government introduced controls on the buy-to-let market in an attempt to control house prices and help first-time buyers get on the property ladder.

Impact: We see a steady growth of buy-to-let activity between March 2009 until the stamp duty changes in 2016 – adding a 3% surcharge on buy-to-let properties. 

You can see a rush of activity as buy-to-let landlords try to get purchases completed before the change kicks in, with £9.6 billion lent to buy-to-let landlords in September 2015 before the announcement, rising to £14.6 billion (real, 2015 prices)¹⁰ in March 2016, just before the changes take effect. 

After the new rules come into effect, the figure drops to £8.6 billion¹¹, and remains relatively flat.

• Housebuilding

Context: After Lehman Brothers collapsed, money spent on construction dropped. The amount spent on new homes fell from £24.9 billion to £18.1 billion¹² between September 2008 and September 2009. 

Impact: Investment in construction, since the financial crash, has ignored all negative economic events (with the exclusion of Covid-19). 

There was a sharp rise in the money spent on the construction of new homes after Help-To-Buy was announced, going from £20.9 billion in September 2012 to £29.6 billion¹³ in September 2014. 

Even with Brexit, money in construction didn't slow down. The only slowdown in construction spending has been during Covid-19 and lockdown.

Key Takeaways for Developers

• Low interest rates have helped a recovery in home ownership, creating more demand for developers to build houses. The rise in construction and new homes built shows that many developers have been able to ride the wave since the market started to recover. 
• The Help To Buy scheme has been a boon for developers. While mostly large housebuilders have made money from the scheme, some small developers that survived the crash have also stood to benefit from this government-backed home ownership scheme. Arguably Help To Buy has helped push house prices up, helping developers. 
• Last time we wrote this we said "it's too early to tell what the squeeze to the buy-to-let market means for developers. Possibly a rise in small developers as former landlords look to new ways to generate revenue?..." and a few other pieces of speculation. Today a clear consequence can be seen – the rise in build-to-rent.  

4. Covid-19 and High Inflation. 

A lot happened after the financial crash – Brexit, Covid-19, and an era of high-inflation. This data story provides context for what has seemed to be high-drama in the media. But let's recount a few key economic events:

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Key Takeaway for Developers

Inflation has grown rapidly, but is starting to decline, (providing some potential breathing room for interest rates). While house prices have remained relatively flat, and mortgages have whiplashed up and down since 2007, one thing has remained steady in its growth – rents.

Since 2008, rents in England have grown by 37.1% and in London by 42.8%, and have had little of the volatility of house prices.

LandTech has partnered with Hometrack to provide you the best in class rental valuations and estimates (as well as other market comparables) so you can capitalise on the latest housing boom – Build to Rent. 

You can find more about our partnership below. 

Footnotes

A methodology write-up would triple the length of this post. For any methodology related questions, reach out to the author via LinkedIn. He doesn't use Twitter (or X.com) and leaving his email here is a recipe for spam.

¹ £21,811 to £58,657 in nominal terms. 

² Quoted figures are also seasonally adjusted.

³ For data series that stretch back before 1988, 1988 prices are used when adjusted to real terms, to account for how the ONS reports CPIH inflation. Otherwise 2015 prices are used.

⁴ £61,946 to £190,031 in nominal terms.

⁵ £9 billion to £25.6 billion in nominal terms.

⁶ £21.4 billion to £15.9 billion in nominal terms.

⁷ £10.5 billion to £3.3 billion in nominal terms.

⁸ £6.1 billion to £22 billion in nominal terms.

⁹ £168,681 to £283,635 in nominal terms.

¹⁰ £10.2 billion to £14.2 billion in nominal terms.

¹¹ £8.1 billion in nominal terms.

¹² £21.4 billion to £15.9 billion in nominal terms.

¹³ £20.1 billion to £29.5 billion in nominal terms.