Chart 1 shows that both UK and euro‐area policy rates were less noticeably out of line with their respective Taylor benchmarks. That too is striking. Indeed, in the United Kingdom, they were actually above the benchmark for much of the relevant period, even though the United Kingdom saw one of the larger run‐ups in debt and house prices during this period. And, in the euro area, countries such as Spain experienced substantial house price booms, while countries such as Germany did not.
In the United States, the monetary policy shocks are associated with, on average, an extra 0.6 percentage points on annual real credit growth and an extra 1.5 percentage points on annual real house price inflation. That is to be compared with average actual annual real credit growth over the period of 5.6 per cent and average annual real house price inflation of 5.8 per cent.
The authors essentially throw their hands in the air and say that although interest rates were unlikely to have been the major force in driving up house prices, they have no alternative explanations. Mass psychology or the extension of credit to less reliable borrowers are possibilities, but they don’t know....Their argument is that although some of the other factors may have contributed, it was the financing over-supply that was critical to enabling the crisis.
http://ftalphaville.ft.com/blog/2010/09/02/332321/the-housing-bubble-reconsidered/Tried to keep it as close to 3 paragraphs as possible, but really read the whole article. Throws cold water on the 'conventional wisdom' about the housing bubble.
