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The Housing Bubble that Burst: Can House Prices Be Explained? And Can Their Fluctuations be Dampened? - Part 1

Experience from the last decade has, once again, demonstrated that large fluctuations in house prices can destabilise the economy. Therefore it is important to understand the factors that drive house prices. This overview article provides a non-technical summary of the most important analyses presented in Part 2 of this Monetary Review. The analyses show that the housing market boom in the mid-2000s was to a large extent driven by the introduction of new loan types and to some extent by the freeze on the property value tax. These measures amplified cyclical fluctuations and have entailed lower employment prospects in the coming years than we would otherwise have seen. Fluctuations in the housing market, and hence in the economy, can be reduced by restoring the link between property value tax and current house prices, and by phasing out deferred-amortisation mortgage loans for owner-occupied housing.