Zoltan Szelyes

Introducing RealEstate&Politics

Here I am giving you an advance warning that some of the content will be politically biased. I personally endorse individual freedom rights and prefer systems and outcomes that are the result of voluntary interaction. Or put in another words: Variables of housing and mortgage markets - such as house prices, volume of home sales, construction numbers, mortgages approvals, mortgage conditions etc. – should in my view be the result of market forces rather than of actions to achieve politically desired outcomes. One could debate that there exist such a thing as a social desirable outcome. But even if you accept it as a goal, there are problems.  Actions that try to achieve new allocations on markets, often have unintended consequences. Just take the subprime debacle that can also be seen as a bad consequence of mixing social policy with finance.

When we look back at the history of housing and mortgage markets, the subprime mess was not an isolated case. The housing and mortgage market was never the thing that economist consider a free market. Since the dawn of human mankind real estate markets have been subject to constant interference by local chieftains, government administrators or elected officials. There are plenty of examples in our daily lives: You can start by how building permits are granted on the local level or highlight the fact that politicians appoint the CEOs of regional or state-led banks in order to influence the financing of their pet projects.

Whenever you as an economist try to analyze housing or mortgage markets you need to develop a judgment about the political dimension.  If you  want to forecast house prices in the US or some European countries in the current environment, you need to consider the effects of the different government programs and their exits. Some might counter that this is just because of the financial crisis and the consequence of reckless lending. But there is abundant evidence of market distortions created by intervention or guarantees before the financial crisis. Just to give one example: Even in the free market oriented USA in the 90ties around 50% of the residential mortgage outstanding was financed by some sort of government guarantees (most part was due to the GSE securitizations).

It seems that governments remain an important player in real estate and mortgage markets for the future, as there are misconceptions about the source of the financial crisis. Free market principles are blamed for causing the crisis. But looking at the boom years, there was not such a thing as a free market but a market that was subject to political goals and there existed a bunch of implicit and explicit guarantees. I try to emphasize in subsequent contributions that there are better alternatives to this hybrid type government-private real estate funding model.