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Why Dont Economists Understand Urban Markets?

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 –

Housing market | The bubble bursts |

And this article by Anatole Kaletsky of the UK Times can only be described as “extraordinary” –

House prices: disaster ahead | Anatole Kaletsky - Times Online

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 –

Bollard urges banks to lend - Business:

This advice will of course by completely ignored by the finance sector and the business community at large –

Radio New Zealand News - Groups not convinced by Reserve Bank pep talk

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.


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