Why Dont Economists Understand Urban Markets And Bubbles?
Comment - Hugh Pavletich
Today’s The Economist is obviously sure that the United Kingdom does not have a housing supply problem (contrary to the
glaring evidence) as illustrated by this article –
And this article by Anatole Kaletsky of the UK Times can only be described as “extraordinary” –
The writers have obviously failed to understand the nature of bubbles – and urban bubbles in particular.
As urban bubbles inflate (due to artificial land scarcities) both lenders and borrowers are “protected” by the
constantly inflating prices, so the usual lending disciplines are discarded.
Conversely – as the bubbles top (due to defaults or other reasons) and start in to the predictable process of deflating
– the earlier “lending protection” of inflating prices evaporates.
Understandably – without this “protection”, lending standards tighten – as lenders cannot be sure how far prices will
fall.
The inevitable transition from inflating asset based lending to income based lending is therefore is unnecessarily
destructive and a traumatic one.
It would appear the Governor of the New Zealand Reserve Bank Dr Alan Bollard does not understand the nature of urban
bubbles – as this article illustrates –
This advice will of course by completely ignored by the finance sector and the business community at large –
This type of advice and commentary only serves to seriously weaken public confidence in the economics profession – and
highlights the urgent need for “structural urban economics” training and re training.
The simple “market reality” is that for bubbles to form – there must be “scarcity”. One only has to compare the current
comparative performance of California and Texas – as one example.
Until economists are trained and retrained to understand “markets” and “bubbles” – regrettably this profession will not
be in a position to provide sound advice with respect to the appropriate policy changes required – to ensure these urban
bubbles do not occur again.
ENDS