Turning Back The Property Clock

With house prices falling steadily for the first time since 1995, how far could the property market reverse?

Even the most optimistic property watchers would agree that the housing boom is well and truly over. Indeed, according to the Nationwide Building Society, the average house price fell by 0.9% in June, following a shocking 2.5% drop in May. In the past twelve months, the average house price has fallen by 6.3%, and is down 7.3% from its October peak.

Nevertheless, Nationwide BS was quick to point out that house prices are still 4% higher than they were two years ago, and 9% higher than three years ago. So, most homebuyers who bought in 2006 and earlier are probably still sitting on a decent tax-free profit.

However, if prices continue to fall, then the property clock will go backwards in time. How much would it take for house prices to fall back to the levels of 2005, 2004, or earlier? Let's find out by studying the data from Nationwide BS:

House prices from June 2008 to June 1995

Source: Nationwide BS, June 2008

As you can see, the average UK property price is now £172,415. In order for this figure to reach the £184,070 recorded a year ago, it would have to rise by 7%. Of course, given the problems in the mortgage market, I think this is unlikely to happen for several years. On the other hand, if prices were to drop by just 4%, we would be back to the £165,730 recorded in mid-2006.

Likewise, if property prices continue to dip, an 8% fall will take us back to June 2005. A drop of 12% would turn back the clock to mid-2004. House prices jumped sharply between 2003 and 2004, so the average price would have to fall by more than a quarter (26%) to take us back five years to June 2003.

After this, things get a lot scarier! To wind back the clock six years to 2002 would take a fall of nearly two-fifths (38%). To go back into the previous millennium -- let's party like it's 1999 -- would require a price drop of almost three-fifths (59%).

Lastly, to reverse the property clock all the way back to when it started in the mid-Nineties would require house prices to collapse by seven-tenths (70%). Yikes!

Frankly, even the most apocalyptic property pundit would not expect house prices to fall 70%, reversing twelve years of rising prices. Indeed, despite being something of a house-price Cassandra, I don't expect prices to fall more than, say, three-tenths (30%) from their current level. Nevertheless, a fall of this magnitude would take us back to early 2003, snatching back all of the growth of the past five years.

For the record, property prices in some parts of the UK fell by more than 30% in the property crash of 1989 to 1994, as I revealed in How Bad Was The Last Housing Crash? and The Last Housing Crash, Part 2. In fact, East Anglia fell by 33.9%, the South East by 30.7%, the South West by 29.3%, and Greater London (supposedly a `property fortress') by 27.9%.

Thus, if the last housing crash is any guide, we can expect the property balloon to deflate a whole lot more. In doing so, it could wipe out five years of property-price rises. So, don't start getting your hopes up until perhaps 2011 at the earliest!

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