It is interesting to watch the expectations of those riding off the recent boom in house prices in the US and the UK. In both countries, there has been an enormous amount of captial put into the creation and revamping of property. If the amount of such investment is excessive what results is a downswing of activity until demand picks up to bring overall demand for property in line with long term needs. Whether these needs may be somewhat higher than in the past is an interesting question. Needs are an essential ingredient to the equations that bring about a balance in supply and demand.
If policy makers wish to reduce the potential for inflation they can do this by actions that influence either demand or supply, or both. Watch for US policy makers desperately try to get Americans to save more and thereby reduce their debt. The policy of lower interest rates did not reduce debt, but made the debt situation over the longer term much worse than it was. However, by increasing the supply of new properties, the policies enable the authorities to dig a hole for themselves in terms of their range of choices in the future.
It will not be possible to lower interest rates to spur real demand for houses. The effect will unfortunately be to lower the exchange rate and to push the economy towards inflation without growth. What do you think the economy has been experiencing for the last thirty years!?
