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.

Related items

  1. Dramatic high-angle drone photograph of decommissioned oil platforms anchored in the Cromarty Firth, near Invergordon, Scotland, as the sun sets over a calm North Sea

    Allies for delivery: Rebuilding faith in Scottish politics via the North Sea

    Can Scottish politicians still build enough of a consensus to deliver meaningful change for disillusioned voters?
  2. A busy high street in Kingston-upon-Thames, London. Shoppers walking beneath multi-coloured bunting

    Bricks vs clicks: The case for an online sales tax

    It's time to rethink how we tax retail.
  3. A pound coin sits on top of a newspaper showing an image of a line graph

    Cost of living, economic growth and stability: How to make this autumn budget a success

    In the autumn budget the chancellor can take three steps towards improving people's living standards.