US housing crash now worse than during the Great Depression

US data released last week showed that US house prices fell by 14.4% in the year to the end of March (this is the S&P/Case-Shiller Composite-20 Index, which the market tends to focus more on – the S&P/Case-Shiller Composite-10 Index was down 15.3%). The track record of these indices is not very long though – the composite-20 index goes back to 2000, while the composite-10 index began in 1987. So Robert Shiller, who is the cofounder of the index, has calculated the change in both nominal and real US house prices going back to 1890. As shown on our chart and reported in this week’s Economist (see here), US house prices are now falling faster than the -10.5% rate witnessed in 1932. Given the month-on-month declines of more than 2% that we’re currently seeing, it should only be a few more months until the year-on-year record of -16.1% is broken, which dates back to 1901.

US nominal house price falls are bad enough, but the picture is even worse in real terms (ie adjusted for inflation). Real US house prices are currently falling by 16.6%, which is easily the worst figure on record. In 1932 for example, the US economy was experiencing deflation of 10.1%, so real house prices were only falling by 0.4%. The US housing market doesn’t appear to be anywhere nearer reaching the bottom either – the supply of houses on the market is very close to all time records, and house prices will have to continue falling until this is cleared.


The UK housing market looks like it is rapidly following the path set by the US. Nationwide have UK house prices falling by 4.4% in the year to the end of May, while HBOS today reported that house prices are down 3.8% over the same period. Taking the last three months of the Nationwide index and annualising it shows that UK house prices are dropping at an annual rate of 17.0%. HBOS’s index has registered monthly falls of -2.5% in March, -1.5% in April and -2.4% in May, which equates to an annualised rate of -25.1%. And unfortunately, UK house prices are set to fall a lot further. We’ve charted the progress of mortgage approvals over the past 18 months (see here for Richard’s comment at the end of April), and as you can see from our updated chart, our adjusted mortgage approvals number is predicting a year on year house price decline of 15% by the end of 2008.

The central banks’ inflationary concerns are preventing interest rates from coming down as fast as they otherwise would do. This, combined with banks’ unwillingness to lend, means that demand for houses continues to wane, and a rebound in house prices is exceptionally unlikely in the foreseeable future. A collapsing housing market will inevitably have a severe knock on effect for the wider economy.

Discuss Article

  1. longodds says:

    Michael land prices traditionally fall at a multiple of house prices so the effects as you say will be widespread and builders with large landbanks which were seen during the boom as a positive factor will feel the flip side of this relatively soon. What surprises me is that retail shares have done quite well recently ie last week or so – this suggests the general market still doesn't believe that house prices have further to fall and the ramifications will be substantial and severe Re: US housing crash now worse than during the Great Depression

    Posted on: 05/06/08 | 12:00 am
  2. Rob Alkin says:

    A very worrying prospect for the economy. Does it have any implications for the purchase of gilts or company bonds. Re: US housing crash now worse than during the Great Depression

    Posted on: 05/06/08 | 12:00 am
  3. Michael Riddell says:

    Thanks for your comments. An article in yesterday's Guardian suggested that the derivatives market is now pricing in a 50% fall in UK real house prices (see https://www.theguardian.com/business/2008/jun/09/housingmarket.houseprices), which does indeed seem at odds with how some of the more vulnerable areas of the equity market have performed recently. I should however point out that the property derivatives market is likely to be distorted – it is not particularly liquid, and a large number of institutional investors no doubt use it to hedge against property price falls – although if 50% falls do play out then some areas of both the equity and bond market will be in big trouble (eg banks and Residential Mortgage Backed Securities).

    As for gilts, a housing slump would normally be seen as good news, since it increases the chances of rate cuts. But rising inflation is giving the Bank of England a major headache, and the UK market is now fully pricing in 2 x 0.25% rate hikes by next summer. This is a dramatic move from March this year, when the market was pricing in three rate cuts. If the rate hikes that the market is now pricing in fail to materialise, then gilts would be expected to perform reasonably well (although of course if rates rise by more than expected, then the opposite is true).” Re: US housing crash now worse than during the Great Depression

    Posted on: 10/06/08 | 12:00 am

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