Are We Heading For Another Housing Crash?

Debate about the housing market rages even at Fool HQ. Another Fool sticks his neck out with an opinion.

There's been some comment on our Property - Markets and Trends discussion board that the current housing market feels similar to that of the late 80s. One poster argued that there were ten buyers to a house back then and greater numbers this time. Shortly after the housing market went ballistic, he writes, the market went into reverse.

Foolish writer Cliff D'Arcy also fears the worst, as he explained in Why The Next Housing Crash Will Be Worse!

However, I'm not convinced that we're heading back to 1989 for two reasons. Firstly, housing supply continues to grow far too slowly to meet increasing demand and, if goods are scarce, prices go up. So the market is working as it should be.

Secondly, a crash needs a trigger and this time there is no obvious one. In the 16 months to October 1989, interest rates went up a staggering 5% to 15%, and they stayed that high for a year. That's an average of a one third-point rise every month for the whole period!

Bank of England base rate from July 1988 to October 1989

Source: Bloomberg

This time it's hard to imagine rocketing interest rates. No one can say that we'll always have interest rates under control, because there are too many variables, both domestic and global, that might affect us. However, they certainly seem to be fairly stable for the time being. So there is no trigger.

Returning to the issue of supply and demand, I must acknowledge that house prices might be too high even after taking into account the massive shortage of houses. It's possible, for example, that many people are rushing stupidly onto the market who should be staying clear because they can't really afford it. In this case, there could still be a bubble.

If the government allowed many more properties to be built, it would relieve some of the pressure, but as it takes so long to build houses, this would be gradual. It would be unlikely to cause a crash. Problem is, the government will be scared of losing votes by stalling house prices, and of receiving bad press about their environmental credentials.

My Editor said: 'For God's sake, put your neck on the line!' So I will. Looking at the current situation, I find it hard to see how a house-market crash could happen in the next few years. I'm sure that some buyers are so stretched that they couldn't afford even a half point rise in interest rates. However, there are plenty more buyers where they came from.

But, as always, remember that property is a long-term investment. Over longer periods you can expect the value of your property to increase, but in the short-term anything can happen.

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