HOW TO TACKLE THE HOUSING BUBBLE?

Three theories for tackling the housing bubble:

    1. Bubble prevention/deflating bubble

Based on the belief that a bubble bursting is hugely harmful. Brennan found, after the dot-com bubble burst, the stock market took three and a half years to recover.

Source: Brennan (2004)

    2. Maintenance bubble

Quinn and Turner argue that not all bubbles are highly destructive. Some may even have positive social impacts, such as encouraging innovation and financing projects with high capital requirements.

To prevent the recurrence of bubbles, Brennan argues that transparency and investor cognition should be improved.

• Transparency: keep prices close to fundamentals, and prevent fraud.
• Cognition: reduce irrational behaviour.

Deflate or maintain the bubble:

Core: calm overheated investment sentiment while preventing it from falling too fast (to ensure that the overheated economy is supported by sufficient cash flow).

Approach:

• Money/credit: raise interest rates and lending conditions (history shows that contracting cash flow is not wise).
• Marketability: restrict house purchases, increase the cost of houses trade.
• Speculation: reduce speculators' expectations of future house price rises; increase the cost of home ownership (Miao et al argued, housing bubble can never emerge with a sufficiently high property tax rate).

The difference between deflating a bubble and maintaining it is whether one of these factors is banned altogether or only reduced to a lower level.

    3. Bursting the bubble

Zhang argues that the "crowding out effect" could allow the impact of the bursting of the housing bubble on China's GDP to be filled by a boom in other sectors.

Source: Zhang (2021)

• Method: Substantial intervention in the factors in the bubble triangle causes the demand for assets to plummet and the bubble to burst.
• Problem: Irrational behaviour can lead to uncontrolled bubble bursts or chain reactions.