Take Some Investments Away from Real Property

For many astute observers of world financial markets, it is clear that this is almost certain to be a very difficult and humbling year. For that reason, the housing crisis that has precipitated this series of financial crises has almost been written about to the extent that it is difficult to say anything new about it. What I suspect is less clear to students of economics is why all this started with housing. Especially since the conventional wisdom is that owning a home is one of the safest ways to invest one's money.

Writing in the regular NYT column, David Leonhardt writes about how US citizens came to be overinvested in real property and housing. Understandably, it all goes to the question of incentives generally and those that deal with the relative advantages -provided by public policy to housing and mortgages. Not only is a higher proportion of taxes deductible for real property but the nominal figure is also high. Considering the first principles that would suggest that people would respond to the incentives, it is altogether understandable that investments would not only be moved into property but they would be kept there in the belief that they would never lose value.

Before there were greedy corporations pushing mortages that were unaffordable for some together with a variety of creative financial instruments, the tax code was already tilted towards house ownership. What is unclear is whether the conventional wisdom has been exploded.