The housing crisis – the multi-causal theory

There are two distinct schools of thought on why house prices go up.  They are so different in their underlying assumptions that they exist in parallel universes. 

 

One is based on the question of supply or rather the lack of it.  It is asserted that a lack of supply lies at the root of housing problems, rising prices, lack of affordability regarded as the main consequences.  This approach reflects mainstream thinking, supported by lobby groups, a number of academics and dominates the political discourse. 

 

The other alternative discourse is more nuanced, essentially dismissing the supply as a major cause and instead is based on an understanding of how changes in housing finance policy, the relationship between interest rates and asset values and the effect of earnings on prices. We could call this the multi-causal theory or approach as it incorporates the various elements which determine changes in house prices and values and impact on affordability and access to housing. 

A future post will set out the evidence behind the multi-causal theory and why it explains why house values increase and associated issues.