The Unassuming Economist

From Works in progress:

“Ireland had arguably the world’s largest housing bubble and crash in the 2000s, with prices quadrupling in the decade to 2007, even while supply soared, before crashing by more than half between 2007 and 2012. Unsurprisingly, this extreme experience has been the subject of much research. Housing has become a critical economic, social and political issue in many cities across the high-income world. At its worst, it even threatens the very concept of living standards in high-income countries, gobbling up a third or even half of the disposable incomes of individuals and households in some locations. But it wasn’t always like this. Adjusting for inflation, the price of housing in high-income countries underwent ups and downs in the century to the 1960s but the trend was largely stable. Though the timing varies by country, it has only been in the last half-century or so that the price of housing has shot up like a hockey stick.

As the world’s largest economy, the United States has been the highest-profile market to make this transition, along with a number of other countries that have followed the same patterns. Ireland is at the extreme end. Like a Rorschach test, people look at Ireland and see whatever suits them most in making arguments about housing and economic policy.

But many of these arguments rely on simplistic myths about what happened. Contrary to many of these claims, Ireland was not a story of overbuilding caused by laissez-faire policy, or an experience that defied standard economics. Ireland built very few ghost towns – housing excesses, where they occurred, were a product of government tax policy, rather than irrational markets. And supply and demand perform very well in explaining the trends. Failing to understand these basics will mean we are susceptible to making the same mistakes all over again.

I have spent much of the last fifteen years studying the Irish housing system, following it from the heights of the Celtic Tiger bubble to the following crash and the subsequent decade of rising prices. There are, to my mind, three myths that have emerged about the Irish housing market that muddy the waters in our understanding of housing markets not just there but everywhere.”