The UK housing Market has a tendency towards being very volatile. The problem with this volatility is that it creates the potential for collapsing house prices. When house prices fall as rapidly as they are at the moment, it leads to negative equity and fall in confidence. Rather than having boom and busts in house prices, it would be better for the government to try and ensure greater stability – avoiding very rapid price increases and rapid price decreases.
The problem is that it is not easy to stabilise house prices. The record since 1980 is not good. However, one of the best policies would be to try and regulate the availability of credit. Making banks save in boom years, so when the downturn comes, banks can draw on their savings (rather than rely on government bailouts)
Yes, this involves intervening in the free market. But, the evidence of the recent boom and bust is that left to its own devices the free market creates a very unstable and volatile situation.
