New study reveals why housing booms and busts are built into the system
Why it matters: Housing volatility, driven by policy choices, can trigger prolonged economic stagnation when busts occur.
- House prices change by almost 6% annually during boom-and-bust periods, significantly higher than the 2.6% long-term trend, according to a study analyzing 23 OECD countries from 1990-2019.
- Dr. Ben Tippet emphasizes that these housing cycles are systemic and shaped by institutions that promote speculative behavior, rather than being random shocks.
- Low capital gains taxes and landlord-friendly rental regimes are identified as key factors making housing markets more prone to speculation, with countries having lower property taxes experiencing 1.85 percentage points more annual price swings for every step-up in speculation-friendly policies.
- Social housing, rent control, and tenancy protections are associated with more stable house prices and fewer booms and busts, offering a clear policy alternative to reduce volatility.
- Mortgage credit availability is not the main driver of housing volatility, and housing supply elasticity has only a modest dampening effect compared to speculation-friendly institutions, challenging conventional wisdom.
- Professor Engelbert Stockhammer warns that while rising house prices can boost consumption and investment, the subsequent bust can trigger prolonged economic stagnation due to deleveraging.
- Policymakers have a clear message: housing volatility is not inevitable but a consequence of choices in taxation and rental regulation, with a regime of high capital gain tax, public housing, and rental protections leading to more stable growth.
A new study reveals that dramatic housing booms and busts, with annual price changes nearly 6% during cycles, are not random but systematically driven by government policies, particularly low capital gains taxes and landlord-friendly rental regimes. These institutional choices encourage speculative behavior, making housing markets significantly more volatile than previously understood, and their impact far outweighs factors like mortgage credit availability or housing supply elasticity.
