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Krugman Right on Housing Bubble Factor

Posted By Conn Carroll On April 30, 2008 @ 11:50 am In Economics | Comments Disabled

Visiting Heritage scholar Wendell Cox has a new paper out titled “How Smart Growth Exacerbated the International Financial Crisis [1]” in which he praises New York Times columnist Paul Krugman’s prescience on diagnosing the role of land use regulation in driving the housing bubble. Krugman wrote [2] on August 8, 2005:

But in the Zoned Zone, which lies along the coasts, a combination of high population density and land-use restrictions – hence “zoned” – makes it hard to build new houses. So when people become willing to spend more on houses, say because of a fall in mortgage rates, some houses get built, but the prices of existing houses also go up. And if people think that prices will continue to rise, they become willing to spend even more, driving prices still higher, and so on. In other words, the Zoned Zone is prone to housing bubbles.

Cox compares mortgage data from metropolitan areas with high levels of land use regulation (like Los Angeles, New York, San Francisco, Seattle, and Miami) to areas with more free market land use policies (like Atlanta, Houston, and Dallas) and concludes:

Simply put, without smart growth, the international financial crisis that has raised so much appropriate concern would have been much less severe. Thus far, the policies of the Federal Reserve Board have failed to take notice of this important connection. Any serious effort to prevent a repeat of such destructive price volatility will require removing these destructive land use regulations that have done so much to destroy housing affordability in many markets while adding inordinately to the financial distress that is being felt around the world. Economics-challenged state and local politicians must not be permitted to steer the international economy into an iceberg.


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URL to article: http://blog.heritage.org/2008/04/30/krugman-right-on-housing-bubble-factor/

URLs in this post:

[1] How Smart Growth Exacerbated the International Financial Crisis: http://www.heritage.org/Research/Economy/wm1906.cfm

[2] wrote: http://www.nytimes.com/2005/08/08/opinion/08krugman.html?_r=1&scp=1&sq=krugman+hissing&st=nyt&oref=slogin

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