Preventing housing bubbles

Over the past week, the two main US house price data providers – Case-Shiller and the FHFA – released their second quarter indices. And once again, they provide a sobering insight into the carnage caused when housing bubbles burst violently.

The national series are shown below, both in nominal and real terms. According to the data, US home values have now fallen back to their early 2000 levels.

Following the bursting of the US housing bubble, unemployment has skyrocketed, with the official (U3) rate having risen from under 5% just before the crash to around 9% currently (with the broader U6 measure of unemployment nearly double this level).

There are now 14 million people officially unemployed in the US, with many more unofficially out of work:

Mortgage delinquencies have also exploded, increasing from around 1.5% before the bust to around 9% currently:

Meanwhile, household net worth has plummeted, caused mostly by huge losses in home equity (charts from Calculated Risk):


The housing pain has not been shared evenly, however, with those markets with stronger regulatory barriers to land/housing supply (‘urban containment’ policies) experiencing far higher price volatility and more pronounced boom/bust cycles (and losses in home equity) than those markets operating less restrictive regulatory regimes.

First, consider the below charts showing prices in those markets where more prescriptive land-use regulations are in place, and the market was hindered in its ability to supply new homes quickly and cheaply in response to changes in demand:

By contrast, consider those markets operating less restrictive land-use regimes, where land/housing supply is more market orientated and supply is more easily able to respond both quickly and efficiently to changes in demand:

The US experience clearly demonstrates how destructive housing bubbles can be. This is why longer-term structural reforms, in particular freeing-up the supply-side, in addition to tighter controls on credit and more efficient taxation arrangements (e.g. abolishing pro-cyclical tax breaks like negative gearing and implementing a broad-based land tax) are critical in preventing bubbles from developing in the first place.

Prevention is always better than a cure…

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Unconventional Economist


  1. Excellent Leith.

    The simple question is – when do political and commercial interests in New Zealand and Australia, intend to start learning from Texas?

    They have had seven Annual Demographia International Housing Affordability Surveys to consider this question.

    • The learning will start after the state and local gov’t disentangles it’s income stream from the housing ponzi.

      So the complex question is “How does Texas as a state fund itself, and can we emulate their success?”

      • there really needs to be a reform of taxation, govt and societies interests arent aligned..

        from memory Texas doesnt have state income tax (US has both Federal and state income taxes) but operate mainly on sales taxes.

        You dont really need much taxation however if expenditure is low and the public sector is small.

      • Texas has few state politicians, and limits their powers in a significant way (legisalature cannot meet more than a quarter of the year- state governor has the least powers of any governor in the country). When politicians can’t spend the state money (they get a fair bit of feeral) it tends to make budgeting easier.
        Also worth noting- schools are funded by local property taxes- ad quality will vary accordingly. Texas is not in the top ten education wise.

  2. I hadn’t seen that “household RE equity %” time series chart before Leith and it really puts into perspective the hollow claims (by the hollowmen/bullhawks) of the “level” of wealth of Australian property owners.

    A 33% change in equity levels (from ca.60% to ca.40%) really shows the powerful effect of leverage, coupled with the consumer behavior outcome thereof.

    • Exactly.

      One of the nonsense things we get told by “anti sprawl” politicians, is that “we can’t afford any more infrastructure”.

      Well, the anti sprawl policies cost the people literally dozens of times as much as the infrastructure would have. And the cost borne by households, for “anti sprawl” housing bubbles, has bought them and society, precisely nothing. No roads, drains, reservoirs, footpaths, pipes or cables. That’s why it’s called a “bubble”. What it contains, what you pay for, just happens to be “nothing”.