Ask an economist or realtor this question and he or she will reel off a long list of economic fundamentals like:
Supply and demand
Interest rates
Immigration
Unemployment
Economic conditions
Cost to rebuild
Availability of land
Location! Location! Location!
Okay, then, in California between 1988 and 1990 house prices rose 50% in most cities. A similar thing happened in New England two or three years earlier, where prices rose up to 75%. In Australia there was an even more stark example house prices doubled, almost country wide, in a 12 to 18 month period from the end of 1987.
What caused these booms? Was there a sudden drop in supply and a huge increase in demand? No. How far did interest rates fall? They rose! Remember those sky high interest rates in 1989? Was there a sudden massive increase in immigration or fall in unemployment? A shortage of land? A rapid inflation in building costs?
It was none of these things. It never is a change in economic fundamentals that causes a boom or bust in house prices, despite what well-meaning economists might tell you via the perhaps not so well-meaning media....
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