Government-Made House Price Bubbles? Austerity, Homeownership, Rental and Credit Liberalization Policies, and "Irrational Exuberance" on Housing Markets

Abstract

Housing bubbles and crashes are catastrophic events for economies, implying the enormous destruction of housing wealth, the risk of financial defaults, construction unemployment, and business cycle downturns. This chapter investigates whether governmental housing policies can affect the propensity of economies to build up speculative house price bubbles. Specifically, we focus on rent and credit deregulation as well as homeownership and austerity policies. Drawing on a long-run time series of data from 16 countries that begins in 1870, we identify speculative price bubbles through explosive root tests, corroborated by a narrative approach. Estimating logit models, we find that tighter rent and credit controls make bubbles less likely to emerge by dampening price increases, while certain homeownership and tenant subsidies and government austerity increase the likelihood of bubbles. The chapter illustrates the logics of rent, credit, homeownership, and austerity effects with two case studies.