Housing bubbles and capital controls

I picked up this OECD chart from Sigrun Davidsdottir on twitter:

House prices EO 93-500x424

This is something interesting, and possibly worth watching for the future. Obviously, wondering about the problems of Cyprus’s economic recovery is very much long-term thinking, but what is the betting that we won’t see more capital controls in the future?

In the event of recovery, and even more so, boom inside an economy under capital controls, there would be a substantial potential for a housing bubble, or a bubble in some asset. Depending on your preferences, as nominal incomes rose, or the money supply rose, or bank credit expanded, you could easily get a bubble as there would be a much restricted tendency for capital to get exported. That is after all the point.

On the other hand, the experiences of the European periphery, very much including the UK, suggest that inflows into an open capital account are also dangerous in this sense. My intuition is that they are more so because they can reverse quickly, and also that after all, if people whose wages go up can’t buy a house, who can? Thoughts are appreciated.

2 thoughts on “Housing bubbles and capital controls

  1. I think professionals from outside of Latin America underestimate the degree to which Latin American policymakers, particularly S. America, are committed to, and moving towards tight control of currency by one or another means. The way the US manages to use upper middle and upper class devotion to the dollar in the S Hemisphere has made effective policies adverse to US and Western Europe interests difficult, no matter how necessary some policies might seem for domestic policy and political reasons.

  2. Pingback: Housing bubbles and capital controls | Fifth Estate

Comments are closed.