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The house price bubble would have driven inflation up, and the BoE would have increased interest rates to correct.
So what effect would the "increased interest rates" have had on the rest of the economy then ?
And you are basically saying that the higher interest rates would have increased mortgage repayments to such a level, that many people would no longer able to afford the monthly payments, and therefore the rise in house prices would have slowed down.
Well if it was that simple and people could be just put off by the increased [i]cost[/i] of buying a house, then house price inflation would never have occurred to the level which it did. The market would have regulated the price.
People were not clamouring to buy houses because they were "dirt cheap".........[i]that was not the problem.[/i] They were buying houses because they were mortgaging themselves up to the eyeballs.
What you are basically suggesting is that the government should have interfered with the market and in effect, brought in price controls for housing. Well that is certainly an option, but one which is unlikely to appeal to the free-marketeers of New Labour and the Tory Party.
So how about the other option then ? If there is too much money chasing not enough produce, how about increasing the supply ? An increase in supply always drives down prices - so we are told.
So build more houses then ! There is after all a desperate shortage of housing - is there not ?