When I started blogging in early 2009, I pushed back against the view that the housing market had gone through a “bubble“. I pointed out that prices in countries such as Canada had risen as much or more than in the US, and yet had not crashed. Commenters told me, “you just wait, the Canadian market is starting to correct.” The same predictions were made about the Australian market.
More than 12 years later, I’m still waiting. Some of my bubble commenters have finally given up and drifted away. In fact, it looks more and more like real housing prices are persistently higher in the 21st century, due to “fundamentals” such as NIMBY regulations and very low equilibrium interest rates.
That’s not to say that real house prices cannot fall in the next few years. They fell in a few markets in 2006-12, and could do so again. Real asset prices in efficient markets move around unpredictably.
The government in New Zealand, where prices are rising at an annual rate of 22%, has taken steps to dampen speculation. The governor of the Bank of Canada has worried about “excess exuberance”, and plans to watch the housing market closely.
The best way the New Zealand and Canadian governments could help would be to eliminate restrictive zoning regulations.
Some people believe that the housing bubble of 2006 somehow caused the Great Recession, and a tech stock bubble in 2000 somehow caused a recession in 2001. I’ve never bought those arguments. Today, almost all assets are very expensive, from homes to stocks to Bitcoin. So can we expect a big depression in 2022?
The economics profession needs to revise its theory of what caused the Great Recession. I have a book coming out in July that offers an alternative view.
Double, double toil and trouble;
Fire burn and cauldron bubble.
—Macbeth's Three Witches1
The anecdote is well known. Queen Elizabeth II was visiting the London School of Economics in November 2008 for the first time in her long reign. Professor Luis Garicano (a Spaniard who has just entered the political fray in Spain under a quasi-Friedmanite banner of 'there is no such thing as a free lunch') was charged with the task of explaining to Her Majesty the sudden se...