Filling the Punch Bowl? The Politics of Housing Bubbles in Australia and Canada

• In Event: Peripheral Politics, Central Problems: Local Politics in Comparative Perspective

Abstract

Elected governments tend to be wary of “popping” asset bubbles. When asset bubbles deflate, deep recessions typically follow and voters punish incumbent governments. Historically, this has meant that independent central banks are relied upon to tame asset bubbles, through raising interest rates, or bubbles are left to unwind of their own accord. In the context of slow growth and demographic pressures, however, central banks in the advanced industrial democracies have recently been constrained in raising interest rates. This means that elected governments must be relied on to prevent or mitigate such bubbles. The question then becomes: under what conditions do elected governments step in to “take away the punch bowl”? This paper addresses this question by looking at the political history behind the emergence of housing bubbles in major Australian and Canadian cities. Some analysts claim that asset bubbles both create and rely upon “political bubbles”, whereby public policy is designed in pro-cyclical ways, loosening regulatory constraints and abetting the process of bubble formation. But the paper shows that this is not always the case. “Counter-cyclical” policy is witnessed in the Australian and Canadian experience, despite often being introduced too late or in too weak a form to subdue housing bubbles. Such policy reactions are hypothesized to be less likely the more relevant policy decisions fall to lower levels of government; more likely to be taken by Leftist governments; and more likely when public opinion perceives the influence of foreign investment to be significant.

Author

• Joshua C. Gordon, Simon Fraser University