The Sustainable Development Round Table’s recent housing report makes two valid points.The first is that affordable and decent housing creates good social conditions, especially for children and for the growing population of older people. The second is that Bermuda lacks reliable and current data on housing, which makes good policymaking difficult. The report also tries to take a longer view of the housing market in charting a sustainable future of Bermuda, but in doing so, assumes that the next decade or two will be like the last two, and that the recent economic decline, and the accompanying collapse in real estate prices, is an anomaly.That may be so, and in some ways, it would be nice if it was, given the misery now being visited on many Bermudians. But it could also be wrong, in which case this report could lead Bermuda into difficulties.So why did prices surge so much in most of the last two decades? The report also notes that the average cost of purchasing a home rose from $400,000 in 1993 to $1.1 million in 2010, an increase of 175 percent. That seems shocking, but according to the Census, in the same period, median household income rose by 120 percent and rents rose by 113 percent. Thus, the cost of buying a home rose faster than incomes, but in relative terms the cost of renting actually declined.The great mystery of Bermuda’s housing market is why demand and therefore prices rose even when the population was only increasing slowly. Between 2000 and 2010, the population increased by just two percent.According to the Land Valuation Department, the number of dwellings rose from 27,665 in 2000 to 31,673 in 2011, an increase of 14 percent. The 2010 Census reports just 26,923 occupied dwellings in 2010, a rise of seven percent, suggesting there are some 4,700 vacant homes in Bermuda, a gap which defies most standard economic rules. In any event, the increased supply of homes exceeded population growth and the growth in the adult population as well. So why did demand continue to increase, forcing prices to rise?Part of the cause is that the average household size has been decreasing, having fallen from 2.9 people in 1980 to 2.4 in 2010. Growth among one parent households was the strongest, at 23 percent, while one adult households and two adult households each rose by 11 percent. Overall, 1,700 more homes were needed in 2010 than in 2000. It might be thought that smaller households would lead to a demand for smaller homes, but the opposite was true. The number of studio apartments and one-bedroom homes declined in the period, while the number of three and four bedroom homes rose by 25 percent.So demand was driven by both smaller households and a desire for better (and more expensive) living conditions, probably the result of the shift in the economy from tourism to white collar office jobs. Nonetheless, it seems demand did not exceed supply as the additions to the housing stock show. But prices still rose, at least until 2008 when the recession began to kick in. Apart from these changes, increases in liquidity also blew up the bubble. The sale of Bank of Bermuda to HSBC led to an influx of money which was sunk into local real estate, thus deriving up prices. At the same time, all the local banks were lending at generous terms with the same consequences.The bubble began to burst in 2008 and realtors now say that prices for entry-level to mid-market homes have dropped 30 to 40 percent since then. In other words, that $1 million home is now worth $600,000 to $700,000. In the rental market, prices have fallen 25 to 30 percent.The question for policymakers now is whether the economy is going to grow or if it will continue to contract. Government and the Housing Corporation apparently believe it will grow or they would not be supporting the Grand Atlantic project or the Dockyard housing development, since both are diluting already depressed real estate prices and in Grand Atlantic’s case, may be priced above their resale value.But if the economy improves, demand for housing would be met and prices controlled. But this is a big gamble. The short term effect is to drive prices down further and put more homebuyers into negative equity. Without some growth, there won’t be any development to sustain and the SDRT’s worries about “soaring home prices” will be groundless.