- Blog Post
- Blog posts represent the views of CFR fellows and staff and not those of CFR, which takes no institutional positions.
I am talking about housing, of course. And it seems everyone else is too. Starting with the New York Times Magazine.
Make no mistake, real estate has boomed over the past few years in part because it has gotten lots of government support.
From China. In order to maintain its exchange rate peg, China has to spend 10% of its GDP a year, give or take, buying dollars - dollars that it then invests in Treasuries. That helps to keep Treasury yields down. And recently, the connection has gotten more direct: the US data suggests that China has stepped up its purchases of "corporate" bonds - widely thought to be mortgage-backed securities. Put differently, in order subsidize Chinese exports, China's central bank has to subsidize American real estate.
And from the US government. Roger Lowenstein reminds us that the US government spends far more subsidizing suburban (and wealthy urban) housing than subsidizing farming - though, for rather obvious reasons, the big suburban (and wealthy urban) dailies tend to editorialize about the ills of agricultural subsidies with more regularity. The mortgage interest tax deduction costs [strike taxpayers] the government $76 billion; agricultural subsidies are a comparative bargain at around $20 billion. [Updated, per the comments section]
(I am taking mandatory spending of the Commodity Credit Corporation as an estimate of farm subsidies - I think that is right, but am not 100% sure)
And just as agricultural subsidies tend to benefit those with bigger farms who produce more, housing subsidies tend to benefit those with bigger houses who borrow more.
Actually that is imprecise. Housing subsidies help those who sell to those who can borrow more as well. And the value of the mortgage tax deduction hinges on your tax bracket, so its biggest beneficiaries are those with high incomes who borrow more - so long as they don't borrow more than $ 1 million.
On either their first OR your second home.
But, then again, the corporate CEOs who cannot deduct interest on their third and fourth home can always try to convince the board to pay their taxes ...
And if you have already paid off your mortgage, you can still deduct the interest on a $100,000 home equity loan - a loan that then will be securitized and sold to the People's Bank of China.
I applaud Stephen Roach for drawing attention to the inequities that have been spawned by a global system that relies on asset price appreciation to make up for a the absence of strong growth in wage income (for those not in the economic stratosphere), and in particular that relies on housing price appreciation in the US, Spain and a few other places to generate demand for all the goods China (and others) want to produce.