In a blog last week, I made the often over-looked point that when you take inflation into consideration, the 1990s house price decline was actually much more severe than people tend to report now (actually down 45% peak to trough in real terms). I suspect that this was one of several reasons why many people I have spoken with in recent weeks, seem to regard the early 1990s turn-down as much more painful on a personal level than the one we are currently experiencing. Whilst we may still be at a relatively early point in the current cycle, I thought it was worth comparing the current situation to that of the early 1990s, if for no other reason than to address some of the press comments I have seen in recent weeks.

Contextual setting – inflation

• The late 1980s/early 1990s was characterised by a period of high inflation with RPI peaking at 10.9% in 1990. Whilst inflation, driven largely by commodities, rose to over 5.0% this summer, the rapid fall in commodity prices and the recession is likely to see inflation down to circa 1.0% by this time next year. The biggest worry now is deflation rather than inflation.

The fall in house prices in 1990s

• The ‘embedding’ of house prices: - The fall in house prices in the 1990s was preceded by a massive and rapid acceleration in the year immediately before. This was in a large part driven by the ending (or rather the announcement of the ending) of double MIRAS tax relief. In the year preceding the crash, prices were rising at over 30% per annum. If you look at the growth of prices in the 2000s, the only point at which we ever got close was in 2002 with rises at circa 22% per annum. In the period leading up to the current decline, price rises were slowing and were rising at just under 10% per annum, suggesting a gradual levelling. The important point of note is that the longer house prices rise without a subsequent correction, the more embedded they become as people view and accept them.      

• Interest rates:- The 1990s crash was a result of rapidly rising prices against a backdrop of very high interest rates. Whilst liquidity is a problem currently, even those customers stuck on SVRs are looking at rates around 5.5% (and likely to fall further) as against 15%. Even if we take a simplistic analysis and look at the average house price (after inflation) now at circa 130% of the 1990 equivalent price, the additional mortgage indebtedness will still mean that for the average persons mortgage payments remain relatively very affordable.

Macro events and the role of Government

• The early 1990s saw strict monetary policy as the government sought to squeeze inflation out of the economy. Through lower fiscal expenditure, wage restraints and high interest rates inflation was brought under control, but at a price. Conversely, inflation is not a concern and the measures being taken by the government is all about stimulating demand not curtailing it.

Whilst we have yet to see the impact on unemployment of the current down-turn, those remaining in work should overall see a considerable rise in disposable income as the VAT cut, lower interest rates and major retailer discounting all play a part. The current down-turn may be a global phenomenon, but on an individual level, it looks as though the ‘pain’ on average could well be less than that of the 1990s.