They didn't see it coming!?!

Here's one of my favourite charts again:
As a general observation, each of those house price booms is followed by a house price bust and a recession. In economics, it is of course always difficult deciding (a) whether such things are pure coincidence (which I much very doubt); (b) whether there is merely correlation (both phenomena are caused by something else); or (c) whether there is cause-and-effect (and if so, which causes which).

AFAIAC, it is a mixture of (b) and (c). As simple matters of observation, housing is in fixed supply in the short/medium term and in the long run the ratio of house prices to earnings is pretty stable. The ratio of rents to earnings is even more stable, in fact it is the most stable variable in the whole housing market, whether short or long run. We also know that all things being equal, falling interest rates lead to rising house prices.

House prices are driven by what first time buyers are prepared to pay (they are referred to as the 'life blood' of the market, 'cannon fodder' would be more appropriate, really); FTBs continually compare the cost of renting with the cost of buying. Therefore, if interests rates fall, for a given housing budget, FTBs are prepared to pay higher prices (albeit for exactly the same house - they are not getting more house for their money).

To kick start the bubble again, you need three basic ingredients:
1. House prices are lower than the long run average;
2. The economy is picking up again;
3. Interest rates are low or falling.

Once the bubble has kicked off nicely, it becomes self-sustaining. People who sell their houses deposit the proceeds with banks, who can on-lend 90%-plus of that straight back to purchasers. The banks get lulled into a false sense of security; they are prepared to lend ever higher multiples at ever lower interest rates. Property price bubbles and credit bubbles are two sides of the same coin. Thus banks become ever more thinly capitalised and embark on ever riskier lending practices using an ever larger pool of 'money'. 

There are then several triggers that lead to the bubble bursting (a few too many mortgage defaults, a slight increase in interest rates, risk aversion on the part of people who provide the banks with money, a modest fall in prices, a spike in oil or food prices etc).

The downward spiral is then self-enforcing of course, as we are now seeing. Falling house prices lead to falling consumer confidence; which leads to falling business confidence. Banks rein in lending to households for home buying and businesses. Banks' mortgage advances are secured on property prices, so people are less willing to lend money to banks etc etc.

So fair play to Camerosborne for finally laying into The Goblin King's economic record; but I refuse to take Camerosborne seriously until they stop yapping on about excessive debt and start talking about what they are going to do in future to prevent house price bubbles arising*.

* It's actually dead simple; you need a combination of sensible banking supervision; liberal planning laws and replacing existing property-related taxes (Council Tax, Business Rates, Stamp Duty Land Tax, Inheritance Tax, Capital Gains Tax, the TV licence fee, Insurance Premium Tax etc) with Land Value Tax. And scrap all subsidies for housing, such as Housing & Council Tax Benefit, obviously.