Over the last couple of years the housing market has been a major consideration in the setting of monetary policy as demonstrated by numerous references in the minutes of the Monetary Policy Committee (MPC). The high interest rate sensitivity of the housing market strengthens considerably the transmission channel of monetary policy, in marked contrast with most continental European countries. On the other hand, there are a number of episodes over the last three decades when developments in the housing market have either been a cause of, or exacerbated, macroeconomic instability. The challenge is therefore to retain the inherent strength of the current framework, i.e. a strong reactivity to interest rate changes, while reducing its drawbacks in terms of potential instability and possible misallocation of resources in the long run. The government is committed to a comprehensive programme to improve the functioning of the housing market, addressing both supply and demand issues. Such measures are seen as encouraging greater convergence with the euro area economies, but are also considered “beneficial in their own right to improve the stability and flexibility of the United Kingdom housing market and wider economy.” The remainder of this chapter puts the UK housing market in international context, evaluates it as a source of macroeconomic instability, and finally considers what the appropriate policy response is, both in the current cycle and over the longer term...