Friday, February 16, 2018

Housing: Part 284 - No Bubbles, Only Busts

Timothy Taylor has a post up today on homeownership rates around the globe.

One of the key pieces of information that is a clue about what happened in the US is that US housing markets were not international outliers until 2007.  We had two markets - the Closed Access cities and the rest of the country.  The Closed Access cities looked like places with housing supply problems like the UK and Canada and the rest of the country looked like places that don't have housing supply problems, like Germany and Japan.

After 2007, prices in the US, along with just a couple other small countries, collapsed relative to those other places.  The Closed Access cities collapsed relative to Canada and the country's interior collapsed compared to Germany and Japan.

Benchmarking to the rest of the world, we didn't have a bubble.  We just had a bust.

Well, it turns out that this is the case if you look at homeownership rates, too.  From 1990 to 2005, homeownership here increased from 64% to 69%.  But, that was actually a slower increase than the typical country experienced over that time.  Then, after 2005, homeownership rates collapsed here, along with prices.  In the rest of the world, homeownership rates are still about where they were in 2005.

No bubbles.  Just a bust.

Side note.  Taylor's post includes this interesting bit:
Interestingly, anecdotes suggest that many German households rent their primary residence, but purchase a nearby home to rent for income (which requires a large down payment but receives generous depreciation benefits). This allows residents to hedge themselves against the potential of rent increases in a system that provides few tax subsidies to owning a home.
We have a lot to learn from Germany.  They are one of the countries with stable home prices.  The reason, broadly speaking, seems to be that we subsidize ownership relative to renting and then we put up policy gatekeepers against ownership and obstructions to new supply.  Germany taxes ownership and has fewer obstructions to supply.  We induce a bidding war on limited stock and they discourage consumption of an abundant stock.

But, this seems like it's a bit too far.  I don't think it makes much sense to have two neighbors renting to one another for a tax arbitrage.  We should do away with the subsidies to ownership, but the goal should be a neutral field.

This is one reason why I think low taxes on capital income are beneficial.  If other capital is lightly taxed, then these potential tax incongruities in housing become less important.  And, in the US, those tax incongruities are regressive and destabilizing.  They subsidize high end housing, and they force households to take out large amounts of debt to finance imputed future tax benefits.

1 comment:

  1. Australia has the same situation--- if you buy a house and rent out, it is a business and you get tax deductions. But not if you buy a house to own.

    Also, in Australia home mortgages are not nonrecourse. If you do not pay your mortgage they can go after your other assets.

    House prices are banana-high in Australia and New Zealand too.

    I guess it all comes back to property zoning, restricted supply and perhaps international capital flows.

    Germany and Japan are notable exporters. Tokyo has a "housing glut."