Can housing bubbles be controlled?
In the U.S., house prices have been rising for 20 straight months and construction permits have hit a five year high. In the U.K. meanwhile, house prices have hit a 40-month high, with some London prices showing double digit growth. It's not unreasonable in this context to imagine a future housing bubble. (In the U.K., that future feels pretty close.)
If one were to emerge, have we learned anything from the last one to help us manage better?
Peter Orszag, vice chair of corporate and investment banking at Citigroup, has argued that this is exactly what New Zealand's central bank is doing today, by limiting to 15 percent the value of high loan-to-value mortgages any bank can initiate. Canada, Israel, Singapore and Sweden are doing likewise.
It sounds a good idea insofar as it forces banks to examine their risk more closely, and it encourages consumers to bring more capital to their homes. But I can't help but notice that the countries doing this have governments that traditionally have exerted a great deal of control over consumer markets. In other words, they have a mandate to manage. Restricting the risk that banks and citizens can take on is something which their electorate broadly supports.
The same may not be true in the U.S. and the U.K., where political parties routinely run elections on promises of economic prosperity. There is no cheaper, quicker route -- for politicians or citizens -- to instant prosperity than a loan that requires little in the way of capital or commitment. The more voters who take out loans to buy homes in a rising market, the quicker and cheaper their sense of well-bring -- and the consumer spending that goes with it.
In London last month, many homeowners made more on the increased value of their homes than they will take home as pay in a single year. No wonder the restaurants and stores are overflowing. Although the Canadian governor of the Bank of England has withdrawn support for cheap mortgages, low interest rates still fuel them. Meanwhile, in the United States, no party wants to be the one accused of slowing an equally tentative recovery. If consumers start spending and then taking on more debt, if house prices boost their sense of well being, even those with the battle scars of the last crisis can't be relied upon to stop them.
One of the lessons we could have, should have learned from the banking crisis was that it wasn't just a banking crisis nor even just an economic crisis. It also revealed deep and troubling flaws in our politics. If politicians buy votes with cheap debt and consumers are willing to be bought, no bank in the world will be given a mandate to stop them. What president or prime minister was prepared to tell people -- before it was too late -- that the good times had to stop, or at least slow down?
It's easy, comfortable and convenient to blame bankers for the woes of the last few years -- and they aren't without blame. But governments and the consumers who vote for them have to recognize that stoking the housing market is not the same as reviving the economy. Rather the opposite: Leaning on house prices to create a sense of illusion of prosperity merely postpones the moment at which we confront the systemic challenges of an economy that hasn't yet found real growth.
