Increasingly Supply Now Won’t Prevent a Housing Bubble

Yesterday it is annual survey from economists the FT reported many saying that an increase in housing supply was necessary now to prevent a bubble.

Also today David Cameron reported that we arn’t in a housing bubble as house prices are still below their 2007 peak.  Two points on this firstly what matters is the house price to earnings ratio and this is well above the bubble peak because of the fall in earnings.  Also today the Nationwide reported that in London prices are above their 2007 peak. So if this isnt a bubble then nothing is.

So it it wide to increase supply dramatically in a bubble? No it is the worst thing to do.  Increase supply by all means but countercycilcially for general market housing and for social housing only when prices are high, in order to prevent a bubble occurring in the first place.  Increasing general market housing supply in a bubble is the very worst thing to do as it increases the amount of new mortgage credit being granted which push up prices further.  It is the very worst thing to do.  You can see that when you look at the house price data for Spain and Ireland during the last bubble with their notoriously weak planning regimes.  Here ready supply simply increased bank exposure and brought both economies down with them.

 

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