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. Doctor with patient for consultation, medical advice or procedure at clinic

    Taken to heart: Inequalities in heart disease in Scotland

    More than 7.6 million people across the UK live with cardiovascular disease (CVD), around twice as many as live with Alzheimer’s disease and cancer combined. 
  2. A beautiful sunset in the Scottish highlands with renewable energy wind turbines far into the horizon

    Skills passports: An essential part of a fair transition

    This month, government will publish its Clean Energy Workforce Strategy. This plan covers two aims. First, filling the growing demand for skills in clean energy industries is essential to keep on track to reach the government’s clean power…
  3. The Bank of England is watched over by a statue of the Duke of Wellington seated on his horse

    Fixing the leak: How to end the £22 billion annual taxpayer losses at the Bank of England

    The Bank of England increased its interest rates over recent years, aimed at reducing inflation. But this has also had an unintended effect on the Bank of England’s massive government bond buying – ‘quantitative easing’ – programme.