The Political Causes of Real Estate Bubbles

A model which explains national-level house price appreciation through utility maximization by rational voters is developed and tested using a global sample of 40 democracies, in order to explain why some countries experienced house price bubbles in the past decade and others did not. In the model, a subsidy funded by a tax on all citizens can be provided to home buyers. The subsidy leads to an increase in house prices, which increases the utility of all homeowners for a while. Heterogeneity in various features of housing markets leads to heterogeneity in how much each homeowner benefits from the subsidy. The median voter decides on the optimal level of the subsidy. The more homeowners there are, the more likely the median voter is to be someone who benefits a lot from the subsidy, and thus who desires more of it. Empirical analysis confirms that the share of homeowners in the population at the beginning of the global house price bubble of the 2000s was the main determinant of the size of the bubble at the national level, with other factors which have been proposed in the literature being relatively unimportant. The policy channel through which the median voter generates house price appreciation is confirmed to have been the generation of loans which ended up being non-performing.