I have a great idea that would prevent all future property bubbles (it won't retroactively fix this one), would cost the taxpayers nothing, and wouldn't disrupt normal property market in any way.

The idea is: when you take mortgage for N dollars, and repay X% (measured as 1 - outstanding debt/value of mortgage) of it, then you can at every time force foreclosure, and get X% of whatever bank gets, minus some pre-agreed fee.

In normal market nobody would need to do that, as they can sell the house and get the same money without the fee.

If prices fall by Y%, then nobody is stuck - they can just force foreclosure, and lose Y% of what they paid (plus a fee) - perfectly reasonable deal. Bank is of course in big trouble, as they lose Y(1-X)-fee of the house value. However this doesn't cause any negative cash flows - bank gets money from forced foreclosure, simply less than it expected.

This forces banks to behave. If they see market is normal they can just operate normally, as nobody would use this option. If property market is inflated, they cannot keep lending as they take most of the risk of bubble collapsing. So banks limit lending, and bubble never develops, a good negative feedback system. The problem is that right now raising property prices make more people want to buy houses, and make lending more profitable, what raises prices even more - a positive feedback system, that is a very bad thing.

Fee needs to be high enough to prevent abuse in non-bubble times, like people changing their minds and few-percent fluctuations in property prices. It also needs to be low enough to offer real protection in case of a genuine bubble.

There's a slight moral hazard here, as people would be more willing to buy if they expected this protection, however it really only limits their loses in case of a major market crash, and if they were expecting a major crash they would stay away from the real estate market anyway, so realistically I wouldn't expect a major behavioral shift. Reduced volatility both ways will most likely have more significant and positive effect on people.

This would have to be legislated obviously. It won't prevent the bubble if banks are too concentrated or too short-sighted or expect a bailout. Even if they get a bailout at least no homeowners will have a negative equity problem, and market will stay liquid even in case of major property price crashes.

Actually I have a second idea - how about retroactively turning existing mortgages into something like that? The banks are all getting nationalized anyway, so we can just legislate that, and it would really unclog the market.

This is in no way related to commercial property, or to complex derivatives that got us into the credit crunch (real estate bubble was just one of many factors, not even the most important factor).

Are there any major problems with this plan?