RES Essay Competition: Preventing Housing Bubbles

The fifth essay available for the RES essay competition prompts students to offer policy ideas for preventing housing bubbles in the future. The Financial Times helpfully defines a bubble as a situation “when the prices of securities or other assets rise so sharply and at such a sustained rate that they exceed valuations justified by fundamentals, making a sudden collapse likely (at which point the bubble “bursts”).” This essay title is likely to be a popular one with the sub-prime crisis fresh in the memory and housing markets around the world continuing to show signs of volatility.

The essay encourages students to understand the often complex causes of asset price bubbles - I feel that a good answer will draw on evidence from a range of countries and consider some of the underlying causes of rising property values both on the demand and the supply side. Which countries experienced the greatest ‘bubble activity’? Was the bubble in the USA and the UK for example the result of market failure? Government (regulatory) failure? Or perhaps it was both?

Can psychological factors explain why property markets experience recurring booms and slumps? Are there lessons from behavioural economics in explaining both the causes of bubbles and also some possible policy prescriptions?

Here is a selection of suggested reading:

Blame it on the bubble (Dean Baker, The Guardian, March 2010) See also Economics in a bubble

Greenspan refutes housing bubble claims (FT, March 2010)

After the Storm (Vince Cable) - Observer Review

Meltdown (Paul Mason)

Animal Spirits (Akerlof and Schiiler) - book review by Clive Crook in the FT

The next bubble: Priming the markets for tomorrow’s big crash Eric Janszen

Economic Bubbles and Financial Crises, Past and Present Rodrigue Tremblay

Reinhart and Rogoff on the Crisis, the ‘Mother of All Moral Hazard’ (Wall Street Journal)

Spotting the tell-tale signs of bubbles approaching Kenneth Rogoff (Financial Times)

The recent work of Rogoff and Reinhart is challenging stuff for AS and A2 students but could well provide some hugely useful and important insights if you are tackling this essay. Reading book reviews and articles by the authors is a good alternative to buying the book and ploughing through it. I also recommend the work of Akerlof and Schiller in providing psychological explanations for investor behaviour in the property market.

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