Wednesday, July 26, 2006

Tax housing speculation profits?

  The great housing price boom of the past 10 years, at least on the coasts, appears to be over; reports are that prices are finally stabilizing.  Why the boom?  Was it a "bubble"?   One factor that certainly fed the fire was simple speculation -- investors bought up existing houses in the expectation that prices would continue to rise sharply for a while.  This sort of expectation, of course, can lead to a "bubble" that is fine with speculators if they sell before the bubble bursts (or, in the sticky-upward housing price market, "deflates like a heavy balloon" might be a better metaphor).  Such speculation-fueled price rises made it tougher for lower-income Americans to buy in the past decade.  Many economists defend the general idea of speculation, of course, pointing out that the profit-sniffing sense in speculation leads the economy to devote more resources, wisely, to whatever is being invested in.  We should applaud anyone smart enough to have invested in fledgling Microsoft in 1982 or in Google in 1999 because their speculation helped create services that benefited American life. 

  But do the benefits of speculation still hold for the housing market?  A problem is that the housing world is about as far from a free market as we get in the United States; rising housing prices don't simply lead to a boom in construction, as simple economics would predict.  This is because new construction is one of the most regulated aspects of the American economy; it is tied up by zoning, environmental limits, anti-sprawl plans, and myriad other factors.  In fact, new construction has not skyrocketed in the nation over the past 10 years, in large part because of these legal limits.  Indeed, these limits act as after-burners to a price boom when speculation does occur.  So what benefit did the economy get out of the speculation-driven price boom?  Probably nothing.  And yet speculators that bought in 2000 and sold this year made an enormous profit (in part attributable to the legal restrictions).  Accordingly, house-buying speculative profits may form the best case for a windfall profits tax.   

http://lawprofessors.typepad.com/land_use/2006/07/tax_housing_spe.html

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