An Econoclectic Perspective
"Interest rates have been low for a LONG time, now."
Yes, and the origins of the almost global bubble in real estate can be traced to virtually the same time that interest rates were reduced so precipitously worldwide as a response to the stockmarket declines.
We should have taken our medicine. We didn't, and the "cure" may well turn out be a lot more damaging than the original sickness. As Stephen King, the managing director of economics at HSBC, wrote in the Independent on Monday (the entire article is well worth a squizz, as they say in Oz):
"Basically, the monetary and fiscal experiment that started four years ago hasn't, yet, been completed. We know some of the results - consumers can be persuaded to spend when equity markets are falling - but we don't yet have all of the results. We don't know, for example, what will happen when consumers start to re-trench. Recent data, though, look increasingly worrying: there appears to be no convincing corporate renaissance coming through to take the burden off the consumer in the months ahead. Interest rates may be peaking at unusually low levels, but this can only mean that the underlying foundations for this economic recovery are unusually weak: the whole edifice is in danger of subsiding under the weight of excessive - and policy-induced - debt."
http://news.independent.co.uk/bu...sp?
story=644563
If green zone regulations are endogenous, brought in by the current residents as large numbers of people start to move into certain areas, they could make the supply of housing in those areas inelastic, so the combination of significant population growth and building restrictions could produce something that looks like a bubble. The difference is that there's no need for that bubble to burst - housing prices could reach an equilibrium high enough to counter whatever was attracting inmigration. The market could settle in at a high price equilibrium, perhaps after a bit of overshooting. There seems to be some evidence that that's happened in some Australian cities' housing markets.
"The market could settle in at a high price equilibrium" -- Brian Ferguson, June 8, 2005
"Stocks have reached what looks like a permanently high plateau" -- Irving Fisher, Professor of Economics, Yale University, October 16, 1929.
It seems to me that housing prices are really driven by two factors: household income and long term interest rates. Household incomes in the US are up, especially after taxes, and interest rates are down, so housing prices are up. They're up because of those economic realities, not because they are out of touch with them. I don't expect household incomes to fall, so interest rates are the only real worry. As I believe you noted before, the measured increases in short term rates are keeping long term rates low by keeping inflation in check. Even slow increases in long term rates will likely only cool the market, not make the bottom drop out. Nationally, of course. In lots of local areas things are out of whack, but some of those areas (such as some parts of California) have a history of great volatility in real estate prices.
Also, keep in mind that US tax laws exempting up to $500k in capital gains were approved I believe in '98 (maybe '97) and may be causing a lagged rise in prices as the tax benefits were slowly understood (in what is a nonprofessional market). I'm not sure you'd agree to call that a contrbution to a "bubble" but thought it was worth mentioning.
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