Why housing equity amplifies, not smoothes, the house price cycle

For a time at least, rising house prices can be a virtuous circle, as equity gains provide the support for further house price growth. But if house prices fall, equity is destroyed while debt remains unchanged, potentially exacerbating the downward adjustment. Such a process seems to have occurred in the US and partly explains why house prices there have fallen below fair value. A severe shock to financial markets or the labour market could see the UK enter a similar vicious circle.