Feb 17, 20235 min read

The UK Property Market Crash of 2008

Thinking that house prices are too high right now? Do you think a crash is just on the horizon? In this blog, we will be discussing the UK housing market crash of 2008, the factors that contributed to it, and how the UK property market was affected.

The Crash of 2008

The UK property market crash of 2008 was a significant event that had a major impact on the country's economy and the lives of many people. The housing market had been experiencing a period of sustained growth for several years, but a combination of factors led to a sudden and dramatic decline in property values.

One of the primary factors that contributed to the crash was the global financial crisis that began in 2007. The crisis was triggered by a collapse in the US housing market, which had been driven by the widespread availability of subprime mortgages and thereby stockpiling a ton of toxic debt. For the uninitiated, subprime mortgages refer to loans issued to borrowers with low credit ratings. Due to the risk of the loan, the interest rates are usually higher to compensate. Toxic debt, on the other hand, are loans that are highly unlikely to be paid back with interest. Continuously issuing subprime mortgages created a housing bubble filled with toxic debt, which we all know, sent shockwaves throughout the global economy when it burst. Now, this is an oversimplification of the events that transpired and is just meant to give you a small background to help you understand how it affected the UK property market, which is the focus of this blog.

UK Property Market Before the Crash

Before we dive into the effects of the crash on the property market, it is important to take a quick peek at what the housing market looks before the crash as shown below:

Both images below are from The Global Financial Crisis by Savills

Average house prices, 90% LTV percentage, and interest-only lending percentage on 2007 & 2017.

Buyer deposit data, buyer income data, and housing transaction data of the property market on 2007 & 2017

From the images, you can see that the house prices and buyer income in the UK in 2007 (just before the crash) and 2017 (the decade after) are almost the same. Percent differences are only at 14.72% and 15.64%, respectively. Why were house prices almost at the level of 2017 back then? The housing market experienced a period of steady yet unsustainable price growth since the mid-1990s. This was driven by a combination of factors such as low interest rates, easy credit, and a shortage of housing supply. However, by the mid-2000s, property prices had become detached from underlying economic fundamentals, such as income levels and affordability.

By the mid-2000s, property prices had become detached from underlying economic fundamentals, such as income levels and affordability.

This led to a situation where many people were taking out large mortgages to buy homes that they could not realistically afford. The availability of easy credit had led to a culture of property speculation, with many people buying homes purely as an investment, rather than as a place to live. This had driven up demand for property, leading to an unsustainable rise in prices.

Going back to the images, a significant percentage of mortgages are at 90% LTV and are interest-only lending in 2007. What would happen once the toxic debt bubble reaches a critical point?

Why was the UK Housing Market Affected?

According to Investopedia, the subprime mortgage loans were sold to Wall Street banks. These banks then, packaged them and marketed them as low-risk financial instruments. In addition, there was a belief that any property investment is a safe investment. Many of the UK's largest banks had invested heavily in the US subprime mortgage market, and when the market crashed, they suffered significant losses leading to a credit crunch. Banks became much more cautious about lending money, particularly to individuals and businesses in the property market.

UK's largest banks had invested heavily in the US subprime mortgage market, and when the market crashed, they suffered significant losses leading to a credit crunch.

How was the UK Housing Market Affected?

Now what happens when taking out a mortgage becomes difficult? Demand plummeted hard! And what happens when there is no demand? Prices dropped hard! Many people found themselves in negative equity, meaning that the value of their property was less than the amount they owed on their mortgage. This made it very difficult for people to sell their homes, as they would have to pay back more than they could get for their property.

Many people found themselves in negative equity, meaning that the value of their property was less than the amount they owed on their mortgage.

At the time, the Bank of England increased rates from 3.75% on February 2003 to 5.75% on July 2007, which then maintained at or above 5% before it finally dropped to 4.5% on October 2008. With such high rates and low property value, mortgage payments (especially subprime mortgages) were left to default. This led to the mass repossession of homes that were deemed worthless due to the price drop. Remember when loans were 90% LTV and at interest-only lending? Our Financial institutions, at the time, not only have worthless assets, but they were unable to milk them enough before the crash.

The crash had a major impact on the wider economy, as the property market is a key driver of economic growth. The construction industry was particularly badly affected, with many building projects being put on hold or cancelled altogether. This had a knock-on effect on other sectors of the economy, such as manufacturing and retail, which rely on the construction industry for materials and supplies.

The government responded to the crisis with a series of measures designed to stabilize the housing market and support those who were struggling. These included a cut in interest rates, a program of quantitative easing, and measures to increase the availability of affordable housing.

Summary

Overall, the UK property market crash of 2008 was a significant event that had far-reaching consequences for the economy and the lives of many people. It was driven by a combination of factors, including the global financial crisis, the unsustainable rise in property prices, and a culture of property speculation. The crash led to a period of economic instability and hardship for many people, but the government's response helped to stabilize the housing market and support those who were struggling.