Asset Bubbles and Busts: Housing Markets in Small Coordinated Market Economies

Asset-based welfare has grown in importance in most OECD economies in the past several decades. Consequently, the welfare of growing numbers of citizens in affluent democracies depends on potentially volatile asset markets. The comparative political economy literature usually associates asset bubbles to liberal market economies (LMEs; Australia, Britain, Ireland, and the U.S.). Yet some of the most striking housing bubbles and busts happened in Denmark, the Netherlands, and Sweden. We argue that housing booms and bust in these three CMEs were the unintended outcome of policymakers’ long-term pursuit of two inconsistent and incompatible housing objectives. On the one hand, the three countries preserved elements of collectivist social housing such as rent control, subsidized rental housing, and land use restrictions, which greatly restricted the supply of housing, therefore pushing up prices of privately owned residences. On the other hand, all three countries have sophisticated financial service sectors with well-developed mortgage lending programs accompanied by tax rules that make mortgage borrowing advantageous. Consequently, the privately owned housing sector began to “displace” social housing in the overall housing policy mix, setting into motion a process of gradual institutional change as affected interests pressed for pro-home ownership policies. Our cases show how the growing lack of coherence between two components of a larger policy configuration leads not only to gradual change in the overall policy configuration itself, but also generates friction as the interaction of one component (social housing in this case) with the other (the owner occupied residential sector) creates dysfunctional effects.