There's a kind of interesting way to think about this, especially in the UK. Because people don't automatically think in terms of opportunity cost and don't know eg. that the long term equity return is X, there's a disconnect between reality and how people think of it. People in the UK think of rent as "wasted" money. In an efficient market, it wouldn't be wasted at all because the saving from lower rent vs mortgage could be put into eg. equity/bonds. Someone will reply that there is no saving but that itself is a symptom of the way we run housing.

But because people think that, and think that no-one would ever want to rent, we tolerate super weird policies like a residency house being exempt from capital gains tax, poor protection for renters, government tax transfers (in the UK they will literally give you money to buy your first house, the government is so committed to the your-house-is-your-bank philosophy). All these distortions then actually CREATE the conditions which mean that you're consistently losing money if you rent, because the government is effectively taxing you much more.

So our misunderstanding of economics creates an economic system which conforms to our mistaken beliefs, it's kind of amazing.

It is true that housing prices in urban areas have risen astronomically in many regions of the world, and while we may well see a correction, I wonder if these these areas have simply become way more valuable than they used to be.

People thought that the internet would make location irrelevant, but it seems that the opposite has happened. I can think of many armchair theories as to why, but it's not a simple question to answer.

He is talking about inflation as a way to resolve it, but my personal (and totally unscientific) pet theory is that inflation is already here. The prices are so high not because the real estate is expensive, but because the intrinsic value of money is declining. How come elevated inflation is not reflected in official stats? The problem with counting inflation is that it doesn't account for the loss of quality which is happening in all areas except high-technology products. E.g. while the price (in real money) for a burger in McDonalds can be more or less the same as in the 90s or 60s, the quality went down due to excessive use of herbicides and drugs in farming.

No wonder many people get debts because it's the right strategy when money are losing value. If the real inflation is say 5%, then getting a mortgage at 3.5% earns you 1.5% a year. No wonder stock indexes are record high nowadays -- it's not because businesses excel more than ever, it's because the dollar is worth less.

Real estate bubbles rarely burst unless there is accompanying unemployment. The reason is psychological, people hate realizing a loss.

Another practical reason is that if borrow $1 million for a house, and it is now worth $800,000 you just keep paying off the mortgage and hope prices go up again. Selling it would require you pay in some cash to pay off the loan. All this is provided you keep you job and can afford the loan.

As a resident of a more rural area that has seen a complete economic turnaround in the last few years, which seems to be attributable to people leaving the big city to find more affordable ground, the big city housing bubble is the best thing that has ever happened. It may be destructive at a local level, but I'm not sure it is universally so.

This whole piece makes me ask what a bubble really means. The author admits to having been wrong about housing prices since 2000. But that’s okay because bubbles can, apparently, last decades. If a bubble can last a very long, but totally indeterminant amount of time, does it have any reality?

It's no bubble now because we don't build nearly enough in these areas. We need some kind of big federal or state project where lots of people get bought out to leave, or moved via eminent domain, and higher density built.

> It is true that housing prices in urban areas have risen astronomically in many regions of the world, and while we may well see a correction, I wonder if these these areas have simply become way more valuable than they used to be.

They are, in the short-term. The problem is that high housing costs have a slow, long-term corrosive effect on a city. Companies have to pay higher wages for workers to achieve the same standard of living, which makes them less competitive. So, for example, you see a lot of tech companies springing up in Austin now. It doesn't happen overnight, but it happens.

It also creates a large net transfer of wealth out of the city whenever someone moves. Someone who moves in with half a million dollars in net assets would normally be a boon because they would go use that money to patronize local businesses, but now they have to spend that and a good chunk of their salary going forward on housing, which goes to the seller who is moving out of the city and taking the money with them.

The housing ratchet is also completely unsustainable. The people who already own real estate want prices to increase rather than decrease to justify the high price they already paid and generate a competitive return on that huge amount of money, but when housing is already the majority expenditure for city residents, costs long-term can't increase faster than wages, and the higher wages get for the same standard of living the less competitive local companies are.

Eventually you reach a limit on how high housing costs can sustainably go, but once you hit it, nobody wants to put down a million dollars for a house that won't appreciate at all when they could be getting some ROI on the same money in the stock market. Then prices finally start to decline, but people definitely don't want to pay $950K for a house that will lose value, so the decline is rapid. This is, of course, catastrophic.

It's almost impossible to avoid this once the values are already ridiculous, but what the article suggests can mitigate it somewhat: Sustained moderate inflation combined with a large increase in the housing supply, so that real values come down even though nominal values are stable. Then the crash is in real value rather than nominal value, so people don't end up with underwater mortgages, and it can ideally happen over a period of a decade or so rather than instantaneously in a way that causes a local economic crisis.

I think it would be very wrong to think of increasing house prices as a direct reflection of intrinsic value.

In the UK the economic model of the past forty years has been based on a conscious policy of asset price inflation. Thatcher stripped away most of the social housing in this country and put it into the market. Few have been built since. The recentering of the economy in financial services has led to a massive expansion of easy credit, that reaches its fulcrum in the housing market. Together this has meant: (a) a dwindling housing stock; (b) progressively larger sums of credit chasing the same number of properties.

That is not to mention the fact the since the late 1960s London has been the main global waystation for offshore tax havens, much of which is attached to property sales in the capital. There are 100,000 properties in the UK which are held as investments, unoccupied.

There's supply/demand - as some area becomes more popular more people want to move there. If you're not building new homes in the area at a rate that at the very least matches both the migration rate and the birth rate housing price is only going to increase. (People in SF fighting against tech folk also seem to fight new properties, ignoring that simply having children in SF means you necessarily must build more homes, maybe just a bit slower)

The thing that makes it worse is when taxable property values trail actual property values - it makes simply holding on to property a tax payer subsidized investment. CA for instance has capped taxable property valuations at 2%, which is a subsidy for empty properties, properties that increase rent/lease by more than 2% a year, and business (which never sell property) - the biggest component of civic services is fundamentally the cost of rent/mortgage, as that dictates how much all civic servants (emergency services, city/county administration, elected officials) need as there /base/ income. It also indirectly costs tax payers through the increased need for housing and other financial support for low income people (which can actually be a double tax, as it may result in tax payers paying rent on a property that is underpaying taxes anyway).

> “I can think of many armchair theories as to why, but it's not a simple question to answer.”

My guess: tools that make it easier to live wherever you want disproportionately benefit the places people most want to live.

One thing surprises me about this article: It prescribes Inflation as the antidote to land/RE prices... But that was not the case necessary for Japan.

And on the other hand they didn't highlight the role international investment in RE has had on local markets. It plays a significant role in many of the major international cities where foreign entities are allowed to buy RE as investment properties.

> I wonder if these these areas have simply become way more valuable than they used to be.

It will self correct once companies realize that by using middle managers with a modicum of domain expertise enables people to work remotely and not have to be at work for 8 hours just so their managers can visually check their presence for the contractually agreed amount of time.

Give it 500 years.

A good start is to look at the interest rate curve (cost of borrowing money has gone down dramatically). Here is the US Fed Funds Rate since the early 80's:

https://tradingeconomics.com/united-states/interest-rate

For starters, there are a lot of places in the US I can't live because I need home access to good Internet.

The faster a bicycle goes, the more stable it is and therefore less likely to fall over. But also when it does fall over, the damage is much more devastating.

You're right that there's a keel keeping real estate from tipping. The reason isn't just psychological (although there is a strong sentimental sense of attachment you have to your house); real estate is also less liquid than almost everything else. Other factors, including proximity to work, children's schools, etc. make it a last resort in terms of liquidating. You're right -- as long as someone can keep up the mortgage payments, they'll do so.

The problem is that the bigger the bubble, the more unlikely someone can maintain those payments if suddenly unemployed or underemployed. The crash of 2008 wasn't so much averted as postponed. Subprime mortgages became 'nonprime mortgages'. The practices are still there. The artificially low interest rates are still there. The bicycle is going a thousand miles an hour and when it really crashes, look out.

> Real estate bubbles rarely burst unless there is accompanying unemployment. The reason is psychological, people hate realizing a loss.

Real estate bubbles generally burst when buy side gets squeezed. It doesn't matter if people sell homes and realize losses. The bursting of bubbles isn't a supply or sell side issue. It's a demand or buy side issue.

But there are many ways the demand side can be squeezed. The most prominent is increasing interest rates. Then there is unemployment as you noted during economic downturns. There are also legal methods - draconian anti-buyer laws. Imagine if a law was passed that banned sale of homes to foreigners and even gave foreigners 3 months to divest all property in X market. Not only would that burst the bubble, it would crash the housing market.

Bubbles form when the demand side is artificially increased while limiting supply side. For example, if you granted citizenship to foreigners if they buy a house. That would spike the demand for homes but the supply of homes wouldn't increase as quickly.

There are a myriad of reasons why bubbles form and why bubbles burst. Ultimately it's the manipulation of supply and demand sides which causes one or the other.

Im no economist but intuitively i would think the key piece is that they “pop”; that is, the market corrects itself ib a sudden and aggressive fashion. That its a “correction” necessitates that the valuation is divorced from its “real” value, the primary mechanic allowing this being speculation.

And ofc, since speculation and correction is always a market, the final piece of the dish is that the speculation (and thus, the eventual correction) is significantly large.

And then given that the market itself lasts long (substantially longer than decades), and that we rightfully fear, not the existence of, but the crash, then it seems fine to claim a bubble lasting decades, and even centuries.

And like all predictions of the future, there’s money to be made in the difference between its actual popping and its predicted pop, if you choose to make the bet. Ofc, money to be lost too. And if you expect it to last a century... then just make sure your grandchildren get out before it bursts (and hope it doesn’t take everything else with it). Doesn’t matter to you particularly at that time scale, but it still exists (unless ofc it corrects slowly... but hey, hindsight is 20/20)

Houses have intrinsic value, which comes from future rental cashflows. Let's ignore the premium that some people would pay over that just because they want to be owners of a house.

Then, it seems to me that house prices can be approximated as a function of rents, interest rates (determining required return on owning a house), and anticipated growth in house prices (which again can be decomposed into growth in rents, reduction in interest rates and 'irrational' growth). Using London as an example. Rental yields appear to be around 3.5% in London at the moment, which suggests to me that a good deal of anticipated growth is priced in. But where can that growth come from? Rents are a function of incomes and are unlikely to outpace inflation. Interest rates seem to be more likely to go up than down. So it seems that house prices are unlikely to rise, and once that is realized by the market, prices may even come down as participants stop anticipating growth just because "London house prices always go up".

So a bubble means that house prices are disconnected from fundamentals, that some irrational assumptions are built into the price. I am not entirely sure that there is a bubble - it seems to assume that you need to assume that there is also a sovereign debt bubble, i.e. the "risk-free rate" or the treasury yields are irrationally low. I am not sure if that is the case or not, but that is the subject for a different discussion.

I can not really give you an intuitive explanation, but economists usually refer to bubbles (or disequilibrium), when actual asset prices deviate from the prices estimated based on the identified long term equilibrium properties of often co-integrated variables.

To identify such models, VAR and SVAR (Structural Vector Autoregressive) analysis are often used, where up to 15-20 time series fed into. Such approaches of course come with their sets of necessary assumptions, but wich are in the case of VAR in levels quite reasonable...

Basically the assumption behind such kind of analysis is, that in the long run, there is some kind of equilibrium path were forces of nature/system are pushing towards to, but to identify disequilibria, you need to look at the whole system and not only 1 or two (as a ratio) variables.

An interesting application about identifying "bubbles" in housing prices with VAR you can find here [1].

[1] https://docs.google.com/viewer?a=v&pid=sites&srcid=ZGVmYXVsd...

It's all guesswork, right? Someone says these house prices don't make sense; someone else says they do make sense. If enough people agree that the house prices don't make sense, then the market would correct, then someone can say that really was a bubble after all.

Prices go up for some reason. That's not a bubble.

People want to buy that asset because that's where the returns are (because the price is going up). Those people drive the price up further. That's still not a bubble.

People see that the returns are really good in that asset class, so they borrow money to buy into that asset class, so a ton more money moves in, limited only by banks' willingness to lend against that asset class. Now it's a bubble.

And the problem with bubbles is not that people lose money when they pop. It's that people lose borrowed money when they pop, and if it's a big bubble, that threatens the banks, which can threaten the whole economy (not just that asset class). And, because people invested borrowed money, as the bubble starts to pop, they panic sell, which drives the price down further, which leads more people to panic sell, so the whole thing comes apart very quickly.