Forever Blowing Bubbles? Housing's role in the UK economy
The housing market is especially vulnerable to bubbles – there have been four in the UK in the past 40 years, including most recently in the mid-2000s (which saw house prices triple within a decade). These bubbles can be hard to spot early, but they must be avoided if we are to avoid the inevitable fallout when they burst.
House price bubbles are driven essentially by housing supply and demand and, in particular, by effective demand: that is, demand mediated by finance. Over the past decade, a large expansion in available mortgage finance via securitisation created a very large increase in credit growth in the UK housing market, and therefore a huge leap in effective demand. The total effect was to exacerbate cyclicality and volatility in house prices, and therefore to heighten the risk of housing-driven economic boom and bust.
It is high time we re-examined the case for mortgage reform in the light of international lessons and our own rollercoaster ride on housing. After all, there is nothing aspirational or equitable about courting another recession.
Tony Dolphin, Senior Economist and Associate Director for Economic Policy
Matt Griffith, Associate Fellow
In the news
Mortgage borrowers face more scrutiny
The Guardian - 19 Dec 2011
For Many in Britain, Being a Homeowner Is a Fading Dream
New York Times - 23 Jun 2011
House prices 'to rise by 4% a year'
Mail - 31 May 2011
Banks must make mortgage conditions tougher for homebuyers
Guardian - 31 May 2011
Britain to become a nation of renters
Independent - 31 May 2011
UK's 'abnormal' housing Market
BBC Radio 4 Today - 31 May 2011
Think tank calls for 90% mortgage LTV cap
FT Adviser - 31 May 2011
Author(s) : Jenny Pennington - 07 Sep 2011
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