Dec 22, 2008
Tax Changes and the Housing Boom
Several economists have started to focus on Clinton's 1997 Taxpayer Relief Act as a source of the housing boom. It allowed people to avoid capital gains on home price appreciation without having to rollover the gains into a bigger house. See the article in the New York Times of December 19 and Russ Roberts' post at Cafe Hayek.
The good news about this factor is that it gets the timing right for the beginning of the housing boom, unlike the attempt to pin the blame on Greenspan's monetary policy. The bad news, as Mark Brady has pointed out, is that U.S. tax changes can only explain the U.S. housing boom and not the European housing booms. Moreover, it can only explain a boom and not a bubble. A tax change should cause a real appreciation in home values that is permanent (until the exemption is repealed), not self-reversing. But then again, that should help prevent real housing prices from returning to their 1997 level.
Hat Tip: Warren Gibson
The good news about this factor is that it gets the timing right for the beginning of the housing boom, unlike the attempt to pin the blame on Greenspan's monetary policy. The bad news, as Mark Brady has pointed out, is that U.S. tax changes can only explain the U.S. housing boom and not the European housing booms. Moreover, it can only explain a boom and not a bubble. A tax change should cause a real appreciation in home values that is permanent (until the exemption is repealed), not self-reversing. But then again, that should help prevent real housing prices from returning to their 1997 level.
Hat Tip: Warren Gibson