Forever Blowing Bubbles? Housing's role in the UK economy
Article
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.
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