Housing booms and busts since 1975

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David Heasman
November 8, 2021
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The housing market is a bit of a national obsession. 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).

A big factor affecting house prices are interest rates. 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 these crashes in a bit more detail. What caused them? What was the fallout? And how (if at all) did interest rates play a part? And what can we learn from them?

Compared to the past 30 years – where interest rates were between four and five percent and had a high of 17% (we’ll get into that later) – interest rates are at record lows.

So (ignoring, the complication of negative interest rates, which don’t seem likely) the only way is up. What impact could that have?

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. 

Ready to dive in?

Alright. Let’s start by looking at the data for the past 45 years.


1. The Economic Cycle – 1975 to Now

The property market has had a few ups and downs in the past 45 years. Hell, you probably lived/worked through most of them.  

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 ones 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 £88,167 to £157,732 in 1989.


  • 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.


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  • 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 Last 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.)

  • 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 £108,382 in 1997 when Tony Blair takes power to peak at £258,875 in September 2007. The money spent constructing new homes nearly trebles in the same period –  from £9 billion to £25.6 billion.


  • 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 £21.4 billion on new homes to £15.9 billion a year later. Interest rates dropped from 5% to 0.5% in the same period. 

House prices (in real terms) have never recovered 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.

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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.)

  • 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 £10.5 billion in March 2007 to £3.3 billion in March 2009. 


Impact: The Help To Buy scheme was introduced in March 2013 to help first-timers, and was effective. Increasing spending from £6.1 billion at the inception of the scheme to £15.8 billion at the end of 2019, above even the 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.

However since Help to Buy came into effect, average house prices (in real terms) have remained relatively flat during this period.


  • Buy-To-Let

Context: Buy-to-let mortgages suffered after the crash, but not as much as first-time mortgages. They dropped by about 20% 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 £10.2 billion lent to buy-to-let landlords in September 2015 before the announcement, rising to £14.2 billion in March 2016, just before the changes take effect. 

After the new rules come into effect, the figure drops to £8.1 billion, and remains relatively flat.


  • Housebuilding

Context: After Lehman Brothers collapsed, money spent on construction dropped. The amount spent on new homes fell from £21.4 billion to £15.9 billion between September 2008 September 2009. 

Similarly the amount spent on all construction took a hit, dropping from £81.7 billion to £67.6 billion. 


Impact: Investment in construction, since the financial crash, has ignored all negative economic events. 

There was a sharp rise in the money spent on the construction of new homes after Help-To-Buy was announced, going from £20.1 billion in September 2012 to £29.5 billion in September 2014. 

Even with Brexit, money in construction hasn’t slowed down as of 2018. We’ll need to wait till 2019 data is released to see if this remains the same. 

Ambitious new-house targets, combined with the political will to see them hit has meant that new homes have kept being built, whatever happened. 


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. 
  • 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? First-time homes being a better bet for developers than other homes? We'll need more time, and data, to tell.  

A Few Notes on the Data

First things first, I’m not an economist. 

I went back and found key dates in history that correspond to economic events. For example, some would argue inflation coming down wasn’t because of Thatcher but because of a global economic trend. Who knows? I’ll let the economists debate that – all that matters is what happened to the housing market as a result.

Also we looked at the base rate instead of mortgage rates. Mortgage rates have a complicated history, to put it mildly, over the past 45 years. But mortgage rates have always been influenced by the base rate, so that was a useful constant.

For new homes built we looked at 'new builds completed', instead of 'net additional dwellings' (the annual figure usually cited by the government), as this dataset goes back further in time. While this excludes the supply of new homes that come from change of use or conversions, new builds have accounted for around 90% of net additional dwellings for the past 10 years, so are a reliable indicator of housing supply.

And very importantly, house prices when quoted were in real terms. It’s true that average house prices have risen since the financial crisis, but when adjusted for inflation, they have not recovered to the same levels. 

And as a real technical note – the graphs of some data were seasonally adjusted so that trends were clearer to see. However, when quoted, the non-seasonally-adjusted data was used. 


How to weather any future storms

If history is any teacher, it’s that change is the only constant. 

Some may have worried that house prices would never recover after Black Wednesday, but then three years later we entered one of the biggest booms in history. 

The market moves in cycles. The bad times happen, but they’re nearly always followed by sustainable growth for those who can weather the storm.

Using our new free appraisal tool LandFund helps you to keep your numbers air-tight, so you’re ready for the worst (even if you’re hoping for the best). 

With sensitivity analysis, you can understand the effect of changing build costs and GDVs. You can model the future and understand the impact of changes (such as interest rates) on your cash flow and profitability. And you can be ready for (almost anything).

No-one knows what’s going to happen next, but modeling the future can help you be prepared.

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Note: This post was originally published in April 2020 and has been updated with new data and for accuracy.