Ever since American house prices started declining, people who predicted that this would happen have been crowing and slagging policy elites who failed to see it coming. I think in some ways the better question is what are you supposed to do about these situations? Right now everyone seems to agree that Norway is experiencing an unsustainable house price boom. You may have recently heard the factoid that Canadian household wealth is now higher than U.S. household wealth, but this too certainly looks like an unsustainable house price boom.
So let’s say Stephen Harper phones you up and wants your advice on what he should do.
Should he take measures to push prices down? So far his government has implemented some mild regulatory changes that don’t yet seem to have really curbed speculation. He could undertake more forceful measures. He could probably make those measures more effective by combining them with a stated policy goal of reducing Canadian house prices. But would that be politically sustainable? Maybe it doesn’t need to be sustained. Maybe announcing a new regulatory package on Monday paired with a stated goal of bubble deflation would work really quickly. You’d have your “Minsky Moment” right there and even if Harper ended up dumped as leader by the end of July the whole thing would be on the way to unraveling. Except which problem would that have solved?
Now in retrospect it does look like countries such as Spain and Ireland whose house price booms were linked to massive capital inflows and a lack of monetary sovereignty should have done something different. In particular, it seems that they should have been running giant fiscal surpluses to build up a war chest that would have let them do stimulative fiscal policy in the event of a crash. But can you imagine this actually happening?
Recall that in the United States, the emergence of a modest fiscal surplus in 1999-2000 prompted immediate political pressure for massive tax cuts. George W. Bush argued that the surplus was evidence that the government was overtaxing the public. Alan Greenspan argued that if the surpluses were left in place, they would lead to socialism. A non-indebted government, after all, is a government that’s buying up the means of production.
I don’t think there’s a clear answer here. To adopt a sensible prophylactic remedy there would need to be overwhelming public and political consensus that current prices are unsustainable. But if that was the locally prevailing conventional wisdom, then prices would fall on their own. I don’t know what story Norwegians or Canadians are telling themselves to justify current prices, but they obviously have something in mind. And the very same thought processes that lead to current prices would naturally block political remedies.