Debates over the housing market, particularly Labour's plan to change tax law around the deductibility of interest costs from rental income, have reached ferocious levels the past few weeks. So what does the world's leading urban economist, Ed Glaeser, who we invited out to NZ as the Sir Douglas Myers Visiting Professor a few years ago, have to say about the matter? In the article below he starts out by saying:
"Housing markets are different from other asset markets. There exist real estate linked assets, including Real Estate Investment Trusts and Collateralized Mortgage Securities, that trade in large markets, but more typically, housing is bought and sold in small, decentralized transactions. This fact is obviously true in the enormous market for single family housing, but it is also true in the realm of commercial real estate as well. The dollar amounts of each sale may be larger, but ultimately the purchase of Rockefeller Center is just as idiosyncratic as the purchase of that Tudor home on the corner, if not more so".
On a topic highly relevant to Auckland, he notes that house price bubbles "do appear to be more extreme" in places where building is difficult. But then he asks "Does it follow that in a world with real estate bubbles it is even more valuable to reduce the barriers to new building? Not necessarily. Even if we were confident that fewer restrictions on building might make bubbles less common or less extreme, we could not conclude that reducing land use restrictions would reduce the social costs of bubbles. For one of those costs is overbuilding and overbuilding will be more severe in places where land use is more restricted".
Turns out this issue is so tricky, Ed worries that should the critics get their way with our politicians and laws are passed whereby Auckland greatly reduces supply restrictions, then such a move may end up crashing the market due to overbuilding. Then see how happy everyone becomes.
He concludes by saying: "Understanding the causes of real estate bubbles seems particularly critical, because these events clearly have large social consequences ... Unfortunately, we are still far from having enough knowledge to confidently recommend any particular policy actions". Unlike most of our media commentators who seem so certain they have all the answers to our housing problems, the world's leading urban economist writes with great humility on the topic.
For sources, see: