Photo credit: Christian Berl via flickr (cc)
Finally I’ve stumbled over a simple explanation by an Austrian of what causes housing bubbles. According to data cited in Mark Thornton’s article, Oslo’s housing prices continue to rise even as other places have slowed or tumbled.
What explains the large increase in prices is an increase in the demand for housing. Part of this increased demand takes the form of people simply being unwilling to put homes on the market in the face of persistently rising home prices….[Also] Oslo, the capital city with almost 1/5th of the nation’s population, has land-use restrictions that keep much land unavailable for construction. This is the same fundamental case that was given for the severe housing bubble in Las Vegas: the government prevented land from being developed. Housing prices in Oslo, however, have not risen much more than the average increase. The largest increases have occurred in areas associated with the oil and oil exploration business…. Norway’s rosy economy is not the result of good policy, but of oil revenues that subsidize their socialist government.
Another factor is Norway’s central bank holding interest rates at an “artificial” low, because they don’t want their krone to appreciate too much (it is viewed as a “safe” currency in a world of depreciating euros, dollars, yen, etc). Low interest rates of course drive housing prices higher.
If the central bank did act and raised interest rates and simply allowed their currency to float, the krone would appreciate and Norwegian savers would get a windfall as the value of their savings increased. This would encourage them to work more, save more, and become wealthy. Every krone would buy more goods from around the world and would buy even more goods tomorrow than today. This appreciation would indeed hurt exporters, such as oil and cheese exporters, but most importantly it would stop and reverse the housing bubble before things get even worse and more distorted.
So, if you were to “get a windfall as the value of [your] savings increased,” would you “work more and save more?” Or would you be inclined to work less, at least for money, and maybe spend some of the windfall?
Thornton doesn’t tell us much about the incomes of ordinary Norwegian working folks. If exports drop, might unemployment increase? How, if at all, does Norway’s sovereign wealth fund contribute to incomes? What proportion of personal income in Norway comprises economic rent, and how is it distributed?
A couple of other issues: Thornton says that Norway looks good not because its citizens govern themselves intelligently, but because they have oil revenues. If that’s true, how to explain Venezuela? They have oil too, but don’t seem to govern themselves so well. Some other explanation?
Then there’s the assertion that land use restrictions exacerbate housing bubbles. A smart growth policy coordinates land development with provision of needed facilities such as roads and sewers, and allows some leeway to avoid worsening the land monopoly that exists everywhere, and in case forecasts don’t exactly come to pass. Over time it makes development less expensive and the cost (monetary and nonmonetary) of living lower (which would increase land prices unless land rent is publicly-collected). The example of Las Vegas is cited, but I always thought Portland had much stricter controls, yet much less of a bubble. Is there somewhere data about this?