Lessons from the Housing Bubble Have Been Forgotten

Because governments see housing investment as a driver for the domestic economy, they overinvest in homeownership by promoting subsidies such as tax deductions for mortgage interest payments and lower capital gains on property sales

October 12, 2016

Former banker and finance author Satyajit Das writes in MarketWatch that housing has been treated more as a financial instrument than as a shelter. Consequently, houses are relied upon too heavily for storing wealth, which exposes households to volatile real estate prices. Because governments see housing investment as a driver for the domestic economy, homeownership is promoted through subsidies such as tax deductions for mortgage interest payments and lower capital gains on property sales. But these practices not only led to an overinvestment in housing, they also mask the lack of growth or declines in income levels and uncertain employment for the parts of the population.

While such policies increase property wealth, they also push house prices higher, rendering homes unaffordable for some. As these policies failed, they led to a hard-to-control, unwinding housing bubble as seen in the U.S., Ireland, and Spain. Sadly, says Das, policy makers appear to have learned little from the previous bubble, as evidenced by their push for low interest rates.

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