What surprised and alarmed me is what all 5 Estate Agents I visited told me. After a hectic January, they said the market has fallen off a cliff in the last couple of weeks, in particular for flats (not new build). They all said typical first time buyers and investors alike were being turned down time after time by lenders.

The words of respected Property Investor Nick Dare on Property Tribes

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I pay great attention to his words because I have Deja Vu from the house price crash of 1989. Big financial events repeat every generation because they can only occur when participants don’t think it’s possible that they can occur.

A generation ago flat prices fell off a cliff. The way that I remember it – it was triggered by the end of double MIRAS tax relief. The Chancellor had caused a big increase in house prices in 1989 because back in those days you could claim tax relief on the first £30K of your mortgage and if people were married they could claim double the tax relief (£60,000 which was about the price of the average house), which greatly reduced their mortgage payments. When he abolished the double tax relief, instead of doing it straight away he gave people from the time of the Budget in March until August before it was changed. Consequently, anyone who had been thinking of buying within the next year or two all decided to do it before August and there was a mad rush of buyers. During that summer I had been house hunting, and desperately needed to move house – my employer had put a time limit on how long they were prepared to allow me to commute to work. I struggled to find a house, places were gazumping, prices were rising by the month, in some areas prices nearly doubled in 5 months as there weren’t enough properties to meet the demand.

Suddenly in the September all the people who had wanted to buy had done so and the market was left with a load of overpriced flats that nobody could afford to buy without the double tax relief. The problem was that the rest of the economy couldn’t sustain this massive increase in flat prices, after all interest rates were around 15%, so suddenly when I walked into an Estate Agent there were 3/4 Negotiators sitting around, having a chat, drinking coffee, and wondering what to do with their day.

I bought a house that I had viewed the previous spring at £160,000, it had raised it’s price to £180,000 over the summer and sold for £210,000. Unfortunately for the Vendor they had bridged to buy their new property in order to fix the price in a rising market, but the sale of their old house had fallen through just as the market fell off the cliff. I paid £180,000 for the property which seemed a bargain at the time, but with hindsight was too much. My old house had a price guaranteed by my employer at £175,000 – it’s value at the time I bought my new house. It finally sold for £120,000. The £55,000 loss in 1990 is around £150,000 at today’s prices.

So that’s what a crash is like and I don’t think we are about to have a crash, simply because too many people are warning against a fall in house prices, and too many people are holding back from buying in anticipation of a fall in house prices. The anatomy of a true crash (be it buying Flats, Gold, Shares in a South Sea Trading Company, or Tulip Bulbs) is that buyers are crowding around to buy from a larger supply. They bid against each other, continually panicking that they will miss out and be the only person to fail to buy. Finally when the last buyer has bought there is still a supply of Flats  (Gold, Shares in a South Sea Trading Company, or Tulip Bulbs) and a Flat seller cannot find a buyer at any price.

Now that description of a crash is indeed what Nick Dare observed. However I cannot sign up to the crash theory currently – there are just too many people who realise that flats are overpriced for a proper crash to occur.