Economist Arnold Kling, at Econ Log, talks a little bit on this post how most explanations for the housing bubble have one serious problem: The international nature of the boom.
He quotes Robert Shiller (Of the Case-Shiller Index)
Dramatic home price booms since the late 1990s have been in evidence in Australia, Canada, China, France, India, Ireland, Italy, Korea, Russia, Spain, the United Kingdom, and the United States, among other countries.
Kling goes on to say:
What makes this a difficult fact is that so many explanations of the house price boom are U.S/ specific. It is hard to argue that the Community Reinvestment Act or the repeal of Glass-Steagall are what account for the home price booms in Norway or Spain. In fact, Shiller's view is that bubble/contagion is the only theory that can account for the multinational nature of the home price boom.
Not to beat a dead horse, but housing supply restrictions are the only reasonable solution to the geographic differences in the housing boom. Every single one of the other explanations fails to account for both the international nature of the boom, and the fact that Texas, and other high growth areas, had no boom. I have sat through presentations of Smart Growth/New Urbanism for the U.S., U.K., Australia, New Zealand, and France. I am willing to bet that many of the booms, but not all, can be explained by the significant increase of land use restrictions.
To review, here’s a list of the common culprits of the housing boom and whether they can account for the international and State-by-state differences with the housing boom.
Community Reinvestment Act – Nope
Repeal of Glass – Steagall (Deregulation) – Nope
Rampant greed and fraud – Nope
Fannie Mae/Freddie Mac – Nope
Low interest rates by the U.S. Federal Reserve – Nope
Arnold Kling’s Securitization Theory – Nope
Land Use Regulations/Supply Restrictions - Yes
Most of these explanations probably had some bearing on the situation, but they fail the critical test of geography.
One last note: I do give some credence to Shiller’s contagion theory, but only as an ancillary cause.
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3 comments:
While I agree that land use regulations had a lot to do with the housing bubble, the other items you dismiss have something in common with land use regulations-- government intervention. There is no economy in the world that does not have significant government intervention in the economy. The particular items are only details, and certainly they will vary from state to state or nation to nation.
Land use regulations are only one form of intervention. CRA, the Fed, and countless other interventions all distort the market. I think we could debate until the end of time the impact of each, but the real cause is government intervention.
I completely agree. Imagine trying to win a game of Monopoly with the rules changing every 15 minutes. Government intervention turns simple economic calculations into guessing games.
Monopoly is a great example. Nobody would continue to play if the rules were constantly changing. But life isn't a game, and we must continue to "play" even when the rules are changing. And that destroys lives.
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