Australia had interest rates consistently 2 to 3 times as high as the USA’s, but have still had a house price bubble that matches California pre-crash. And this bubble has inflated another 25% in the last 2 years. So clearly there is no stopping people once they have these expectations in their heads -even though they have the negative example of California displayed for all to see.

An Australian economist, Alan Moran, has written an excellent book (also online as a PDF) called “The Tragedy of Planning”. He analyses numerous factors that apply to housing markets in different nations and proves that it is urban growth boundaries that are responsible for the bubbles. All the other factors have counter-examples somewhere in the world that disprove them.

As it happens, the ONLY housing markets that did NOT have a speculative bubble, are the low-regulation, non-urban-growth-boundary markets that do still exist in parts of the USA and Canada. Is that not enough evidence?

Oh, Germany and Japan were still recovering from previous collapsed bubbles. But note Oliver Hartwich’s study of how Germany has developed a regulatory environment that avoids housing unaffordability. The study is called “Bigger Better Faster More”.

It is actually not hard to calculate how loose urban growth regulation needs to be to avoid the land supply being cornered by “land bankers”. There needs to be so much free land, that it would be uneconomic for any land banker to hold it for the duration of the “x” years worth of “supply” contained within the growth boundary.

“x” years needs to relate to demand at PRE BUBBLE price levels. Of course “years supply” drops as prices go up.

The only factor that EVERYONE got wrong, was the urban limits. Not everyone had Freddie Mac, the HUD, the CRA, lack of capital gains taxes, etc etc. Why are so many people so anxious to blame every factor that DOESN’T explain this, and ignore the only facor that DOES?

In order to originate as many mortgages as possible, unregulated fly-by-night lenders came up with “no doc” loans (where the borrowers do not have to show any proof of income). You just walk in to the unregulated mortgage company and pretend that you make $1 million a year. You get a huge loan, no questions asked. Keep in mind that mortgages used to be regulated by a rule that required an FDIC institution to issue them. However, the mortgage lobby came up with unregulated “mortgage companies” that skirted this regulation, allowing no-doc loans.

This scheme also promotes fraud on the part of the originators. Under a legal principle known as “holder in due course,” the holder of the mortgage cannot be sued for fraud committed before he bought the mortgage. In general, the fly-by-night originators are out of business every few months, changing names and locations frequently, so they can’t be sued. Now, anyone trying to sue for fraud has to go after the entity holding the mortgage. However, that won’t stick because the entity is a “holder in due course.” The homeowner is out of luck. This protection for the holder, usually a large Wall Street firm, or Fannie/Freddie, added to the problem. Again, government did not regulate this.

I think that there is a better argument that this scheme, with the no-doc loans, the selling and re-selling, the pooling and securitization, and faulty risk calculations caused this problem. All of this was allowed because of a lack of regulation, not the other way around.