Housing boom not key cause of crisis, study claims

Contrary to received wisdom, the UK’s housing and lending boom of the 2000s was not the key cause of that decade’s financial crisis, research has claimed.

The boom was nothing unique, according to Comparing Housing Booms and Mortgage Supply in the Major OECD Countries, a 12-page article published in the latest issue of the National Institute Economic Review.

The authors, Angus Armstrong and E Philip Davis, reached their conclusion after comparing the boom of the 2000s with that of the late 1980s, which did not lead to a global banking crisis.

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Their research said: “On balance we reject the idea that the recent boom was in some way unique and hence the key cause of the crisis.

“This poses a challenge for the existing narrative claiming the housing boom was the unique and key determinant of the crisis.

“We suggest that other factors distinguishing the cycles that warrant further research include the initial level of debt/income and the related impact of inflation, the impact of lower interest rates in the recent boom and global contagion via liquidity in the recent episode; the ready availability of credit from mortgage bond issuance.”

The research showed nominal house prices rose more in the earlier boom, corresponding to higher inflation in the 1980s.

It also says real financial wealth grew much more in the earlier period, despite the stock market crash of 1987, rising at rates in excess of real house prices, whereas in the later boom real house prices rose more than wealth.

According to the research the average change in real house prices was similar for both 1990-1994 and 2007-2011, with both suggesting drops of 6 to 7 per cent.

The paper said: “There are more similarities than contrasts between the booms.

“Stylised facts include a similar rise in real house prices where booms took place, and a marked rise in the real mortgage stock along with real incomes.

“The aftermath periods are also comparable in terms of house price changes. Econometrically, determinants of house prices are similar in size and sign from the 1980s to date.”

Adviser view

Craig Taggart, head of mortgages at London-based Baigrie Davies, said: “It is a difficult call to make.

“You could argue that the way the banks were lending money was slightly irresponsible with no proof of income required and light-touch underwriting.

“But the fact is that the properties have got to be there to buy and people were buying them. The market was flooded with people trying to buy, which drove the prices up.”