Facing up to house price deja vu

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Analysis By Kevin Peachey Personal finance reporter, BBC News House prices have dropped by 14.6% in the last year, says the Nationwide

Faced with a nosedive in UK house prices, some homeowners are suggesting we learn from the past to prepare for the future.

Many say that studying the last housing downturn of the 1990s would ease the pain of the current slump.

So, what was the picture more than a decade ago? Are young buyers and sellers making the same mistakes as they did back then?

Readers' views

There is no doubt that a strong body of opinion reacting to previous stories on the housing market believe we have learned nothing.

As well as realising their own aspirations to become owner-occupiers, first-time buyers help oil the wheels of the housing mar CML <a class="" href="/1/hi/business/7699841.stm">Buyers' and sellers' stories</a>

"My advice is to enjoy your house as a home, something we have forgotten about in this country," said one BBC website reader from Bath, recalling his home's value dip from £52,000 to £36,000 and then recovery to £60,000 in the 1990s.

Other readers suggested that saving up a hefty deposit before buying cushioned the blow of falling prices.

Some stressed that patience was a virtue as house prices would recover, yet there has also been surprise that the banks were so free in their lending during the latest boom.

"I used to be in this situation [negative equity] myself in the early 1990s and I am very surprised that the government of today has allowed this to re-occur," wrote Mark Coleman, of Kettering.

"In a stable market, house prices rise due to demand, the banks are happy to lend money way above earning figures, and this is a recipe for disaster. Why has nobody learned from previous situations."

Comparing falls

Is he right? It is worth having a look at the numbers.

The latest figures from the Nationwide reveal that compared with a year ago, prices are 14.6% lower. The price of an average house in October was £158,872 - nearly £30,000 less than their peak a year earlier.

Prices are on course to end the year at least 16% lower than at the start of 2008.

Now let's look back to Nationwide's data when prices last plunged.

House prices were at a peak of £62,782 in the third quarter of 1989, dropping to £50,128 in the first three months of 1993.

That was a fall of £12,654 or 20.2%. Prices then rattled along the bottom of the trough for the next two years.

But the most illuminating figures come when the prices are corrected to take account of inflation, which was much higher back then.

These show that, in real terms, the prices fell by 37.4% from a peak in the second quarter of 1989 to the trough in the last quarter of 1995.

That explains why it felt so much worse in the 1990s than it does currently, even though we are already down by nearly the same amount in absolute terms.

First-time buyers

The group who would usually benefit from falling house prices would tend to be first-time buyers.

The average home loan is less than three times the applicant's income

But this time, the legacy of the credit crunch is the demand of larger deposits from the banks.

Even though house prices have been falling, the average deposit grew from £14,500 in the second quarter of 2007 to £19,000 a year later, according to the Council of Mortgage Lenders (CML).

"In the current market environment, 100% mortgages are not so widely available," the CML says.

"So even though the total needed to buy a house is declining, first-time buyers are facing a new affordability challenge in the shape of a higher deposit required by lenders."

An increasing proportion have turned to relatives to cover the shortfall, but that could dry up as a recession bites, the CML warns.

This would cut down on the number of young people borrowing beyond their means - a criticism from some experienced homeowners.

The average new mortgage holder borrowed less than three times their income in August, the first time it has fallen below a multiple of three since February 2006, CML figures show.

But lenders argue that as first-time buyers dry up, this creates a problem for the housing market as a whole.

"As well as realising their own aspirations to become owner-occupiers, first-time buyers help oil the wheels of the housing market," the CML says.

"By moving into home-ownership, they create opportunities for existing owners to move."

It welcomes the government's attempts to extend schemes, which will allow young people to buy a share in their home, while renting the rest.

This will only have a modest effect on the housing market. It will take more to kick-start lending in more general terms.

But the CML said recently that predicting the short-term course of house prices was "futile".