Here in the U.S. we tend to think of ahousing bubble as something new. However, it is clear from S&P Case-Shiller data that home prices in Los Angeles rose 69% between Jan. 1987 and Jan. 1990, then they proceded to drop 27% over the next 6 years. It is also insightful to look at the experience that other countries have had with land use planning.
According to Vincent Benard at Objectif Liberte, England passed a "Town and Country Act" in 1949, and then expanded it in 1965. This was a series of laws to "protect" English cities from bad development by creating review committees. Since that time, it has been much more difficult to build new homes. My theories on home prices and supply restrictions predict that this will cause abnormal growth in home prices, followed by speculation (a.k.a. extrapolation), then a bust. Did this happen?
Let me define abnormal growth in home prices as being a point in time where home prices grow significantly above income growth. We saw this ratio of home price/income grow from a traditional multiple of 3 up above 10 in our bubble.
The chart below reveals that this is not the first home price bubble in England, but the 4th gyration. (HT: Objectif Liberte)
This notion is reiterated by this graph of real home prices (I assume this means inflation adjusted).
I have said before that I think the housing bubble will repeat itself. Looks like England proves this all too true.