Inside Money: Pop, bang, crack goes the housing bubble

Photo / NZ Herald

"We now accept that in any given year, there is likely to be a financial crisis in at least one country in the world," Stephen Cecchetti, economic adviser to the Bank of International Settlements (BIS), cheerfully begins a conference speech made earlier this year.

The conference, a joint project of the BIS and the Reserve Bank of Australia (RBA), tackled the perennial, but arguably now more globally urgent, issue of 'Property markets and financial stability'.

While the conference was held in August the RBA has only just now published the remarks of "senior central bankers and leading academics" as they attempted to draw important lessons from history and data sets.

According to Cecchetti, "... property price booms are much worse than equity price booms".

"And they are worse in virtually every way. This means that understanding property markets is a key to understanding when financial stability is at risk," he says in the speech.

And if anybody thinks they did understand property markets and the link with financial stability, a quick spin through the conference papers will disabuse them of that notion.
For example, John Muellbauer, an applied macro-economist based in Oxford University, points out that a universal approach to the issue is unlikely to work.

"The differences between the economies [he studied] are so extreme as to call into question the 'one size fits all' tendency of conventional modern macroeconomics," Muellbauer says. "Clearly, institutional differences, as well as different types of economic shocks, matter greatly."

He offers a couple of "multi-equation" solutions that will appeal to econometricians everywhere. Muellbauer also backs some kind of price-linked property tax - without much hope, though, of its global application.
"The politics of property are very sensitive, and wealthy elites have a powerful influence," he says.

Cecchetti notes, however, that some progress has been made in constraining the housing monster with advances in global measurement standards and new policy tools.
Curiously, he also says removing banks from the equation might improve the property market equilibrium.

"The answer, I believe, is that if we could substitute market mechanisms for the bank provision of credit to the property sector, we would have a more stable financial system," Cecchetti says.

Unfortunately, even if this hypothetical version of debt collateralisation were to be successfully implemented the housing bubble mentality would not completely pop.

"But we would not eliminate boom-bust cycles and the problems of overbuilding and overconsumption that they create. These real problems are more fundamental than the financial structure itself," Cecchetti cheerfully concludes.

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