Looking back at the past two years it seems that the housing market is subject to irrational expectations helping to exaggerate booms in house prices that later prove unsustainable.
Why do Booms in Housing Markets occur and why don’t People see Them Coming?
The nature of the UK Property Market encourages volatility. With inelastic supply (unresponsive to changes in price) a change in demand causes a bigger % change in price. E.g. during boom the relative shortage of supply pushes up prices
Banks Encourage Bubbles and Aggravate Downturns.
With house prices rising, banks become much keener to lend. The last housing boom encouraged a range of unconventional mortgages which allowed more people to get on property ladder and enabled the house price to income ratio to increase.
However, as soon as prices fall, banks need to protect themselves from negative equity and falling prices. Hence the sharp rise in required deposits.
Difficulty of Predicting Housing Market.
It is true that many were predicting house price falls just before the housing boom turned to bust. But, it is also worth bearing in mind, people were saying they were overvalued and set to fall from 2002. House prices are still higher than in 2005.
Irrational Exuberance.
There is also an element of irrational exuberance. When prices are rising people tend to block out bad news. The potential of making large wealth gains appears tempting and there are no shortage of ‘experts’ saying how to get in on the bubble.
The big question is will the same trends in the property market be repeated again?
In the present climate, it is hard to imaging banks reverting to past mortgage lending. But, in the aftermath of the last crash. How many were predicting another boom and bust of even greater magnitued?
1 comment so far ↓
The property market is cyclical there will always be highs and lows. Even though we may not see a downturn caused in the same way and to the same scale as now, I have no doubt that we will see certain companies making the same mistkaes a few years from now unless some sound regulations are put in place.
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