My column in today’s Fin (Subscription required) is about the (putative) bubble in housing prices. After noting that virtually all economists think there is a bubble I observe
There is a paradox here. In a country with a longstanding suspicion of market forces, economists have normally been among the few defenders of the market. Even relative sceptics put more weight than the average Australian on seeking rational economic explanations of market outcomes. Yet in the case of the housing boom, ordinary Australians have shown a faith in the market that would put the most devout Chicago economist to shame….
A bad end to the current boom would mark the failure of the separation between monetary policy and prudential regulation introduced following the report of the Wallis Committee. The whole program of financial deregulation would be called into question.
The implications would be even more striking if the current putative bubble turned out to reflect a sustainable increase in underlying values. If the doubling of house prices over a few years is not a bubble, then it is clearly impossible for economists to recognise one when it is in progress. It would be hard to imagine a more triumphant vindication of the efficient markets hypothesis than this.
If anyone has a plausible story as to how the rise in asset prices is sustainable, I’m eager to hear it. Sustainable in this context means that the value of the flow of services from housing should equal the rental cost implied by current prices and reasonable real interest rates.