It is also completely tangential to my point, which is that you cannot both have a high fraction of owner-occupiers and responsible real estate taxation, because that is unstable against tax-cut populists: The tax-cut populist gets to enjoy the bubble, the responsible party that comes after it gets to clean up the mess. That only works if either (a) the voters understand that the pain they suffer during the cleanup is actually caused by the irresponsible tax-cutters, not the responsible adults who raise real estate taxes. Or (b) the fraction of owner-occupiers (and their dependents) is sufficiently small that you can fuck them over with relative electoral impunity.

I would not bet a lot of money on (a), let alone an election campaign.

Of course, you could get creative and automatically index mortgage principals to some real estate index. That would prevent homeowners from going underwater when the market tanks (and reduce their ability to play the leverage game). But then you'll have your banks running equity risk, and I am not completely sanguine about the implications of that for financial stability.

- Jake

If you only spend 20 minutes of the rest of your life on economics, go spend them here.