A comparison of the current housing market downturn with the slumps in the mid 1970s and early 1990s suggests prices could fall by a further 15% from October levels, with a recovery delayed until 2011 at the earliest.

On a quarterly average basis, the Halifax and Nationwide house price measures both peaked in the third quarter of 2007. By October, the Halifax index had fallen 16% versus 14% for the Nationwide.

The first chart below compares the inflation-adjusted decline in the Nationwide index with falls in the last three housing downturns – 1973-77, 1979-82 and 1989-95. The comparison is made in real terms because high inflation bore the burden of reducing housing valuations in the 1970s and early 1980s. The Nationwide index is used because the Halifax measure began only in 1983. The inflation adjustment is based on the retail prices index.

The decline in real prices since the third quarter of 2007 has closely matched the initial stages of the 1989-95 downturn. This was the most severe of the three, with a peak-to-trough fall in real prices of 37% over 26 quarters.

For comparison, real prices fell by 32% over 15 quarters in 1973-77 and 17% over 10 quarters in 1979-82.

The second chart reverts to nominal prices and shows illustrative scenarios assuming 1) inflation-adjusted house prices follow the same path as in 1989-95 or 1973-77 and 2) retail prices rise at a 2% annualised rate.

Interestingly, both scenarios suggest a bottom in nominal prices in the first half of 2011, at 15% and 13% respectively below the most recent – October – level. However, a repeat of 1989-95 would imply a further three years of stagnation, with a sustained recovery beginning only in 2014.

Could prices fall by even more than in the early 1990s? Based on the rental yield – a better measure than the house price to earnings ratio – housing overvaluation was less extreme in 2007 than 1989. Also, the early 1990s slump was exacerbated by sterling’s membership of the ERM, which constrained cuts in official interest rates.

However, these factors could be outweighed by the current mortgage famine, caused by banks' efforts to shrink their balance sheets, high funding costs and the rapid rundown of Northern Rock’s loan book. Cuts in official interest rates alone will have limited impact on mortgage credit supply.