To the extent that fiscal or demand side policies have an effect, the removal of owner-occupier tax benefits and implementation of higher property tax rates can remove some volatility in home prices - and the Open Access cities tend to utilize some of those policies. But, these policies work by changing the underlying intrinsic value of properties. They allow the price mechanism to work. They don’t bring prices down by blocking access to ownership. They bring prices down by creating access! The association of housing dislocations with deregulation is pernicious. Closed Access cities in the boom had deregulated demand and regulated supply. Open Access cities in the boom had both deregulated supply and demand. Now, because of limitations on mortgage lending, Closed Access cities have both regulated supply and demand, and Open Access cities have deregulated supply and regulated demand. Which of those four contexts is the just, fair, and functional context? Is there any question?
The United States has imposed the worst set of policies at every step of the shifting housing market. First, we imposed severe supply constraints in our most economically dynamic cities and combined that with an innovative financial sector that created financial access to those highly sought after markets – sometimes with securities that contained risky terms like low down payments. Then we imposed financial suppression, but not by eliminating favorable tax treatments or other reductions to the financial advantage of owning property. The set of responses we imposed have resulted in a dysfunctional mortgage market where value is not the constraining factor in housing demand – access is. Qualifying for a mortgage has become more constraining than being able to afford a mortgage. We have imposed both supply and demand shocks in dysfunctional ways. Instead of creating a housing market where buyers can make decisions on the margin, we have created a binary market. Can I get a rent controlled apartment or not? Can I satisfy all of the local interest groups to build a new condo building or not? Can I qualify for a mortgage or not? Do I initiate a short sale and put the negative equity on the bank or not? Do we make a go of it one more year in the Closed Access city or migrate?
Binary decisions lead to stress, anger, and social dissonance. Policy should always aim for allowing decisions to be made on the margin. This is the foundation of a liberal, civilized society. Even worse than the high costs created by limited supply is the lack of marginal choices.
Wednesday, September 28, 2016
Housing: Part 180 - The association of housing dislocations with deregulation is pernicious.
From the current draft of the manuscript: