Economics, 3rd Edition

The Rise in House Prices

The thirst for credit on both sides of the Atlantic, particularly in the form of mortgage lending, has been 

cited as being a cause of the bubble in house prices. Panel (a) in Figure 37.1 shows UK house prices from 

1983–2008. It can be clearly seen that the average house price rose dramatically from the late 1990s to 

2007. Panel (b) of Figure 37.1 shows the index of house prices in the US. Between 2000 and 2008, house 

prices in the US had risen by around 80 per cent.

As house prices rise, the difference between the principal borrowed and the value of the house increases – 

positive equity. An individual may have a mortgage for 

£250,000 but a property worth £375,000 and thus 

have positive equity of 

£125,000. Lenders were not shy in allowing borrowers to exploit positive equity and 

with the security of a valuable asset (and the expectation that prices would continue to rise) the ease with 

which homeowners were able to add to their debt increased.

The effects of deregulation, the existence of relatively low interest rates, apparently stable economic 

conditions and the increase in risk seeking activity amongst financial institutions, all came together to 

create a rise in house prices fuelled by rising demand and easier access to credit. In the UK, the increase 

in the number of people being able to access mortgages was the direct result of the willingness of banks 

and building societies to develop new products to allow those who would previously not have been able to 

economic bubble

 when prices of assets and securities rise way above their true or fundamental value

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784  PART 15  INTERNATIONAL MACROECONOMICS