Over the last decades, robust growth in the property market has been a major factor in driving economic growth, while a fall in property prices has on more than one occasion accompanied a recession. The UK property market experienced steady, and sometimes sharp, growth from the late 1990s up until the end of 2007, when it fell sharply. Declines in real estate prices have historically been driven by various factors. The crash in the early 1990s was largely a result of a sharp increase in interest rates, whereas the decline in the market that began in 2007 was caused primarily by tightening credit conditions in the wake of the U.S. subprime crisis.
The UK’s housing market faces similar problems to those of the U.S. For years, loose credit conditions and historically low interest rates led to excessive borrowing and the issuance of increasingly high-risk loans. There are, however, crucial differences. The UK has a tighter prperty supply, due to space and planning restrictions, which helped to keep up demand, even when credit was scarce. Interest rates can also buoy demand—the house price recovery in late 2009 was helped by low interest rates set by the Bank of England. Despite suffering more severe reductions in output and a weaker economic recovery than the U.S., at the end of 2009 house prices in Britain rebounded more strongly than those in America.
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