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The government response is unprecedented too: interest rates cut to their lowest level since the Bank of England was created; a cascade of initiatives to limit repossessions; nationalisation in all but name of many of the leading banks; and billions of pounds in extra government loans to prop up bank lending.

In the blue corner stand recession, unemployment, slump and even depression. In the red (deep in the red) are the prime minister who saved the world, the Bank of England and the newly humbled banks. And in the middle, the housing market – its fortunes inextricably linked with the rest of the economy – and homeowners and potential buyers facing unemployment and a mortgage famine.

Just about the only thing for which there is a precedent is what a year ago many pundits were saying would never happen: that the housing market boom would be followed by a bust. House prices trebled between January 1997 and August 2017. They have already fallen 19 per cent since then.

This is the fourth time we have seen the same scenario in the housing market since the war. All involved large booms followed by smaller busts. Direct comparisons are tricky because of the different rates of inflation and because house prices tend to rise by more than the rate of inflation in line with earnings and rising wealth.

Since the 1970s, according to the Nationwide building society, the long-term trend in house price rises has averaged 2.9 per cent above the rate of inflation. The graph on page 20 shows what’s happened to house prices in real terms and how they have compared to the long-term trend.

The first boom and bust (1971–77) saw prices soar 52 per cent above the trend of inflation plus 2.9 per cent and fall 5 per cent below it. Number two (1978–1982) saw prices rise 19 per cent above the trend and fall 8 per cent below. In number three (1986–1995) prices were 34 per cent above the trend before falling 30 per cent below it.

This time around, in the long boom between 1997 and the third quarter of 2017, prices rose 31 per cent above the trend. The sobering thought is that even after the fastest annual decline ever recorded, they are still 3 per cent above it.

The experience of the last three busts suggests that they have further to fall – possibly much further. The whole point of booms and busts is that they tend to overshoot and undershoot long-term trends.

The top two graphs on page 21 show different comparisons between the four boom and busts. In terms of earnings, house prices are still significantly over-valued. However, that measure does not take account of how low interest rates make higher mortgage repayments more affordable, and repayments as a percentage of income are now close to their long-run average. None of that matters, though, if nobody can get a mortgage. The fourth graph shows quarterly mortgage lending to first-time buyers since 1975. Then, as now, a credit crisis rather than rising interest rates was the trigger for the crash and that was the last time that loans to first-timers were as low as now.

The solution then was direct government intervention. The government injected £500 million (the equivalent of £3.5 billion now) into the market through loans to building societies. Meanwhile, local authorities were encouraged to give mortgages.

The credit crunch of the noughties seems much more intractable. What began in the sub-prime lending market in the United States has spread through a globalised financial system that had turned billions in mortgage debt into trillions in mortgage-backed securities and other financial instruments. That securitisation market funded the housing market boom. Northern Rock was the prime exponent of it but most other lenders were jealous of its ability to tap such a cheap source of funding.

Once securitisation hit the buffers, a wave of fear went through the markets. We still do not know the size of the final bill or who will end up footing it. Uncertainty is compounded by the deepening recession and falls in the value of assets that loans are secured against – not just houses but commercial property too – which in turn has deepened the fear.

So far none of the government’s attempts to get lending going again have worked. Under the latest plan, the Bank of England will implement a recommendation to buy up mortgage-backed securities. However, the move appears to be limited to deposit-taking banks and seems to do little for the specialist lenders who funded most of their lending through securitisation.

Meanwhile, loans will inevitably go first to the safest (or most prime) borrowers. It’s tempting to argue that securitised lending to sub-prime borrowers is what got us into this mess in the first place. If lending was restricted to what banks and building societies could take in savings, surely that would help make housing affordable for everyone? And if lending were restricted to prime borrowers surely the misery of arrears and repossessions would be substantially reduced?

The problem with that argument is that it would leave vast numbers of people with no prospect of ever getting a mortgage. That is what happened in the 1970s, when strict regulation of building societies meant no mortgages above 90 per cent. Even during the noughties boom, millions of people who were self-employed, in insecure employment or who had previous payment problems could not get a prime mortgage. That number is set to expand rapidly during the recession.

So what happens next? The consensus among economists is that 2019 will see a 13 per cent fall in prices and that any recovery will not come until 2010 at the earliest. The most optimistic forecasters see a 5 per cent fall; the most pessimistic fear 20 per cent. The latter include Capital Economics and Lib Dem deputy leader Vince Cable, two of the few forecasters to get 2018 right.

In that context potential buyers fear to buy and lenders fear to lend. What little lending there is in the market is taking place at loan to value ratios of less than 75 per cent, which prices out anyone without a hefty deposit. And this situation is compounded by the fact that an over-supply of unsold new build flats means prices are falling faster in the part of the market most likely to attract first-time buyers.

Little wonder that the forecasts for other market indicators are also dire. The Council of Mortgage Lenders sees transactions and lending falling even further in 2019 and says net lending (the difference between new mortgages and loans paid back) will be negative for the first time ever.

Optimists point to the scale of government action to stimulate the market and limit the damage. Deep cuts in interest rates and falling house prices mean a rapid return to affordability. Action by the Bank of England frees up lending at last. Rising numbers of buyer enquiries at estate agents point to pent-up demand from up to 750,000 potential first-time buyers. Prices bottom out some time in 2010 and a recovery begins. That optimism is relative though. Eventually, the whole cycle of boom and bust begins again, exacerbated by the dramatic falls in house building seen this time.

Pessimists see the effects of the interventions outweighed by those of the recession. As in the 1990s, house prices take years to recover in real terms. Even when they seem affordable, fear of unemployment holds buyers back. Lenders become permanently more conservative and are far more constrained by regulators. Housing becomes affordable but inaccessible to anyone without a large deposit. Levels of home ownership fall, putting even more strain on waiting lists and the private rented sector. It takes longer but eventually the whole depressing cycle begins again.

Further to fall

So how does this boom and bust compare to the last three? And what does history say will happen next?

On the surface, this downturn and the one in the early 1990s seem much worse than those of the 1980s and 1970s. However, inflation was much higher in the first two booms. Although house prices did not fall in nominal terms, both saw significant falls in real terms.

Taking the Nationwide’s figures, the 1997 to 2017 boom saw prices rise by 147 per cent in real terms. Within that, prices rose 76 per cent between 2011 and 2017. In the developing bust, prices have fallen by 18.5 per cent since the third quarter of 2017.

The first boom and bust happened in the early 1970s. From 1971 to 1973, prices rose by 64 per cent in real terms. By the summer of 1977 they had fallen back by 30 per cent. The second happened between 1978 and 1982. Prices rose by 69 per cent between the start of 1978 and mid-1981, then fell 6.3 per cent in the next year. Boom and bust number three came between 1986 and 1995. This saw prices rise by 47 per cent in real terms between 1986 and 1989 and fall back 37 per cent by 1995.

These figures make it seem as though booms are always bigger than busts. But this is a trick of the maths: an increase from, say, £50,000 to £100,000 is a rise of 100 per cent; a slump back to £50,000 is a fall of 50 per cent.

However, house prices tend to rise in line with increasing earnings and wealth. On average over the past 35 years they have risen by inflation plus 2.9 per cent per year. The black line on the graph shows this trend while the red line shows what happened to house prices in real terms.

In the three previous booms and busts real house prices have overshot the trend at the top of the boom and undershot it at the bottom of the bust. By the end of 2018, despite their fastest ever annual fall, house prices were still slightly above trend. This suggests they have significantly further to fall.

Mixed messages on affordability

Fundamentally, house prices are related to the ability of people to pay them. However, affordability can be measured in many different ways.

The left-hand graph shows house prices in relation to incomes (the average of all households). On this measure, even after the house price falls in 2018, prices are still at 6.9 times incomes – 38 per cent above the long-term average of five times incomes. All the way through the boom, this measure was sending a clear message that prices were significantly over-valued and were set for a crash. This comparison makes the last boom and bust looks like a minor affair.

Click to see this graph at a larger size.

However, this is not the only way to judge affordability. Mortgage rates in the noughties have been significantly below the levels seen in the 1970s, 1980s and 1990s. Although banks have been reluctant to pass on low interest rates, mortgages seem set to get even cheaper.

The right-hand graph shows the costs of paying an average mortgage as a percentage of disposable household income. Rather than take individual earnings, or the earnings of households that have succeeded in becoming homeowners, the graph uses the disposable income of all households. On this basis, by the end of 2018 mortgage costs had fallen to 39.5 per cent of household income – just below the long-term average of 40 per cent.

On this measure, housing was far less affordable in the last boom and bust because interest rates were so much higher. Mortgages accounted for 70 per cent of disposable income in 1990.

Lending slump hits first-time buyers

Lending in general has slumped during the credit crunch, but that does not reveal the full impact on people trying to get into the market. If you have a deposit of more than 25 per cent, or if you are remortgaging an existing property, you are much more likely to be able to find a loan. However, that leaves most first-time buyers out in the cold.

Click to see this graph at a larger size.

The graph shows the number of loans made to first-time buyers during the past 35 years. The 2018 third quarter total of 44,300 was the lowest ever recorded and less than half the number made in 2017.

The last time the number of loans went that low was 44,500 in the first quarter of 1974 when the 1970s credit crisis was in full swing.

Those first-time buyers who have been able to find a mortgage have also found themselves paying more. Bank of England data shows that the gap between rates charged for 95 per cent and 75 per cent loans grew steadily though 2017 and 2018. In October, November and December there were so few 95 per cent loans that they do not show up in the stats.

House prices plummet

According to the Halifax, house prices have now fallen 19.9 per cent since the peak of August 2017 and by 18.9 per cent in 2018. That is the steepest fall since it started publishing figures in 1983.

Last year saw five months in which prices fell by more than 2 per cent and only once (in September 1992) has it recorded a larger decline. Not bad for a year in which it predicted prices would be ‘flat’.

The annual rate turned negative in April and the rate of decline was still accelerating at the end of the year.

To put that in perspective, the worst year of the last housing market downturn in 1992 saw prices fall 7.4 per cent.

However, as ROOF went to press, the Halifax revealed a surprise 1.9 per cent increase in prices in January. This contrasted with a 1.3 per cent fall reported by the Nationwide.

It is possible that this is an early sign that dramatic cuts in interest rates are having an effect, particularly when taken alongside a rise in mortgage approvals in December and reports by estate agents of rising enquiries by buyers.

Last time around prices continued a slow but steady decline until the middle of 1995 and only recovered their 1989 peak at the beginning of 1998.

Glimmers of improvement?

Mortgage approvals are one of the most important early indicators of housing market activity. For the past six months they have been down 50 per cent on the levels in 2017 and the monthly totals are by far the lowest recorded by the British Bankers Association (BBA) since it started publishing the figures in 1997.

Market optimists point to increased buyer enquiries recorded by estate agents and a 27 per cent increase in approvals in December compared to November. However, this was still half the level in December 2017 and the BBA itself warned that this was probably down to delayed activity from November.

Not moving

The 12-month rolling total of transactions fell from 1.3 million in mid-2017 to less than 800,000 by September 2018. The full-year total will be even lower and the fall could continue well into 2019.

Taking separate figures published by HM Revenue & Customs, the British Bankers' Association predicts that transactions will fall from 1.6 million in 2017 to 900,000 in 2018 and 700,000 in 2019.

As Richard Donnell, director of research at Hometrack, points out, this is the equivalent of homeowners moving once every 31 years rather than once every 16 years. Transactions at such low levels make house prices even more volatile.

Worse to come on repossessions… and mortgage arrears

The Council of Mortgage Lenders (CML) is predicting that 75,000 families will lose their homes in 2019 – the same number as 1991, the bleakest year of the last recession. Its records only go back to the 1980s, so it is not possible to compare what happened earlier than that.

The CML made the forecast despite being aware of a series of government initiatives to alleviate the problems.

Click to see this graph at a larger size.

These include funding for mortgage rescue schemes, a new pre-action protocol for mortgage possession cases, restoration of the cuts in income support for mortgage interest and a still-to-be-finalised plan for a two-year payment holiday for borrowers who suffer loss of income but not their job. All of these should go some way to help but most are temporary changes.

Last year there were 45,000 repossessions, broadly the same as in 1990 at a similar stage of the housing market cycle. Anecdotal evidence suggests that half of those were by sub-prime lenders.

However, the CML figures do not include repossessions by second charge lenders so the real total is higher still.

Arrears have not risen nearly as quickly. Last year saw 210,000 borrowers more than three months in arrears, compared with 390,000 in 1995 when the CML first started publishing the data. This was after the worst of the early 1990s recession.

However, the CML is predicting an increase to 500,000 this year. Part of the increase will be because the low interest rates mean the same amount of arrears will be the equivalent of more months of payments.

Built out

Housebuilding fell to just 107,000 starts last year in the UK – a far cry from the government’s target of 240,000 net additional homes for England alone.

Housebuilders have been under such severe pressure that they have cancelled and mothballed projects around the country. Private starts for sale have suffered the most but there has also been a knock-on effect on section 106 starts for housing associations. The situation is set to get worse and the Construction Products Association is predicting just 70,000 starts in 2019 – the lowest peacetime level since 1924 – and 95,000 in 2010. Part of the reason for the steep fall is that so many of the homes being built were flats – precisely the area of the market where prices have fallen fastest.

The slump in new supply could help to slow the fall in house prices in the medium term. In the longer term it is storing up problems and a potential new boom and bust.

Bye to let

Full-year figures are not available for 2018 but quarterly figures from the CML show that the buy-to-let boom is over. Over 20,000 advances were approved for buy-to-let purchases in the third quarter of 2018 – half the level seen in 2017. Figures also show an increase in the number of buy-to-let investors losing their property. The number of properties with a court-appointed receiver of rent quintupled between the second and third quarters of 2018