Housing Market Cycle - Where Are We Now?

The graph below shows changes in mortgage approval levels over the last 16 years together with movements in real house prices. In Scotland, real house prices, despite the peaks and troughs, have grown by around 2% per annum since 1974. The red line shows the trend since 1997. The housing market has at times been above and below this trend, but tends to revert to it over time.



Since 2008, real house prices have turned down and are now below trend. Comparing this cycle against the 1980/90s, we can see that real prices have not dropped as far in this cycle as in 1989/90. Why has this crisis had a less of a negative effect on real house prices? There are 2 main reasons for this:

1. Interest rates – Since 2009 the base rate has been 0.5%. Between Aug 1988 and April 1992, the base rate was in double digits, averaging just under 13%. This put pressure on home owners and led to more distressed sales.

2. Build rate – In 1990, the UK build rate was over 200,000 homes. In the last year, it was circa 140,000. This lack of new supply has supported prices.

As the housing market recovers (now being seen in the rising number of mortgage approvals), we can expect real house prices to turn up again. The dotted line would see us having a similar cycle as the previous one from 1990-2007. It is likely to take to around 2018 before real house prices will be equivalent to what they were in 2008, but after that growth is likely. The housing market is highly cyclical and such patterns can be expected to be repeated. Although it is unlikely that lending would ever get so out of synch with wages again to generate the house price bubble that we saw over 2001-07, the long-term trend does indicate that we can expect stronger real house price growth in the next few years. Rettie have recently upgraded our house price forecasts – we are now expecting 20% growth over the next 5 years.