One of the reasons speculative bubbles might exist transitorily is known as the bigger fool theory: I'm willing to pay more for something so long as I believe I can sell it to someone else soon for even more. I strongly suspect there was an element of this theory at work in the real estate bubble of 2002-6 and likely again in some parts of the UK today.
This theory is captured very well in this two-panel Hagar cartoon [via MA]:
The cartoon is applicable to any type of speculative bubble: tulips, real estate, mortgage-backed securities with liar loans, etc.
One thing for sure that has contributed to sky-rocketing housing prices and other recent bubbles related to real estate and housing finance is gubmnt programmes. They were major contributors in the naughts and they are again: People worry about affordable housing so they implement programmes designed to increase the demand for housing, driving prices even higher. Duh.
From the previous link,
Concerns have been mounting about property prices overheating in the South East amid ... the launch of Government mortgage support schemes such as Help to Buy, which have unleashed a flood of first-time buyers into the market.
I really wonder if voters and legislators understand this simple proposition. Worse, I wonder if they even care.