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This theory doesn’t work for one of the biggest bubbles of 2007, which was Las Vegas. It has nothing but surrounding land to build on.

They built like crazy and still had massive price inflation followed by a bubble popping, prices dropped almost 50% and vast swathes of empty houses remained for years and prices only recovered to the peak in the last year or two.

Money laundering explains Vegas and New York.

But how exactly can you launder money through buying a house? If you buy, essentially you declare you have the money, thus question can be asked where you got it from.

That seems to explain it rather good (not that I would be able to tell, but it real estate money laundering is problem):

https://www.icij.org/investigations/fincen-files/a-kleptocra...

That is an interesting bit from the lined article:

"One of the biggest issues that the report cites is the use of geographic targeting orders as the U.S.’s primary tool to identify potential money laundering events. GTOs impose reporting requirements on real estate purchases, but only in narrowly targeted scenarios — large cash purchases by legal entities in specific geographic areas."

With a mortgage certainly the bank will ask where your down payment comes from. But do all-cash buyers really get asked where the money comes from?

In the UK at least, solicitors will ask where the money came from to comply with anti money laundering regulations.

https://www.theguardian.com/money/2013/feb/20/cash-buyer-sol...

I reckon flipping houses and renovating is one way - Buy an older house. Spend dodgy money into some serious renovations. Sell house for <original price> + <cost of renovation>. Money washed.

I imagine you can pay some extra in cash to get the property while the official price is lower, but still realistic. You are then getting an asset that you would otherwise not get, using cash in part.

When I bought recently, I wasn't asked the source of my downpayment as long as I could show I had the funds going back at least 3 months. I presume they do some sense check against income sources (i.e. if you have $300k down payment, but only make $30k/yr and you're 25, they'll ask where it came from), but otherwise if it was "seasoned" (you could show you had such funds over some time period), they didn't dig further.

Now that's much more scrutiny than lenders were showing back in 2007. Back then, if you had cash in a bank account, all good.

In terms of laundering, it's basically passing money through enough legitimate transactions as to conceal the source. So let's say you have $1M in money from illegal activities. If you can get it into a foreign bank account, you could transfer it to the US, buy a house, sell 2 years later. If anyone asked where the money came from you've got a few years history of legitimate investments.

It’s typically done at the construction stage, with high-rise buildings and other assets more valuable than a family home. Banks or other lenders are typically involved. Here’s one example.

https://newrepublic.com/article/143586/trumps-russian-laundr...

Erdmann adds to the thesis in a very valuable way by pointing out that people move out Zoned zone to Phoenix and other US metros.

Sorry, I missed out some more of this.

Erdmann divides US cities into Closed Access Cities (CACs), contagion cities (CCs) and Open Access Cities (OACs). The CACs were New York, Boston, the Bay Area and Los Angeles where building housing has become very difficult and where the prices are shooting up. The contagian cities were places that people who moved out of the closed access cities went to. These include Phoenix and Florida. The Open Access Cities were places like Houston, Atlanta and Dallas where sufficient housing for population increases was being built. Erdmann describes the CACs as having a chronic undersupply that has caused many people to move into the CCs. The OACs saw some ride and an increase in homebuilding but didn’t see nearly the drop in prices as the other types of cities.

Shut Out suggests that a reaction to the rise in housing prices that was occuring in CACs led to policy that brought up interest rates and caused prices in the CCs to drop which then led to a loss in confidence and a drop in housing prices across the board. Erdmann says that excess credit wasn’t the primary driver and points to the fact that the increase in US house prices was well underway before the bad loans came in.

From a review on Goodreads of Erdmann's book:

https://www.goodreads.com/book/show/43062766-shut-out

Interesting but to claim excess credit wasn’t the primary driver seems to ignore that credit was clearly in excess in it couldn’t be repaid, even when prices correctly slightly. That’s pretty much a definition of credit becoming available in “excess”.

And the categorization seems "after the fact". I mean if you look at prices and then lump cities into categories, you're not really predicting anything.

That's not totally inexplicable. It takes time to do the construction so in the meantime the price goes up.

In a normal market the investors would predict the price coming back down when the construction catches up so it would only go up a little bit, since most prospective buyers would e.g. rent until they could pay less for one of the new units. More to the point, the bank would predict that and not give you a loan that size.

Pre-2007, banks weren't doing that. They were giving loans to everybody regardless of creditworthiness or risk because they were buying credit default swaps which create moral hazard. So unsavvy borrowers overbid on existing properties about to revert to their construction cost and you got a bubble in a place you normally wouldn't.

>..Las Vegas. It has nothing but surrounding land to build on.

Not to focus on one single point of your post, but Vegas is in fact nearing the point of having developed the easy area in the surrounding flatland of its valley, and is now beginning to abut the surrounding mountains (and federally owned land). Vast tracts of surrounding uninhabited land does not necessarily mean it is easily developed and habitable.

Which is crazy, because you would think that Australia was mostly Flatland! It's the size of the continental US, with a population lower than Texas.

Everyone here lives in the capital cities, and last I looked there were almost no tech jobs at all further up the coast between Sydney and Brisbane.

I wonder if pandemic working from home is going to change this, some of our devs have already moved up the coast...

Probably because it's mostly desert

It is, and yet we still only really live in three cities (150km in length along a 26000km long coastline)

Three cities (presumably Sydney/Melbourne/Brisbane) is a weird way to describe Australia's population distribution. Perth is basically the same size as Brisbane. "We still only really live in two/four/five cities" all would be more accurate.

No. The non-desert land per capita in Australia is more than twice that in the US.

Its not just desert, it about water as well. If I not mistaken large parts of Australia had drought in the last couple of years.

So is California. And Texas.

Flatland is a state of mind where the state government try not to interfere too much and people in general have a less nimby attitude, Australia is the opposite of it.

There used to be an IBM office in Gold Coast, many moons ago. No idea if it's still there.

That stretch of coast has been seeing massive house price inflation recently as well, IIRC.

In Cal it's an infrastructure issue - how to get roads and utilities (sewer, water, gas, electric) to relatively remote areas, how that is organized (incorporated/unincorporated areas) before even thinking about building structures

You can buy remote country houses for around 100k ..

> some of our devs have already moved up the coast...

How do they do this and stay connected? I remember seeing a guy that did this in a van while subscribing to multiple wireless providers. But as far as I am aware Australia still doesn't have the best coverage, service and technology. Moreover, if you're going out more remote locations, I'm sure your connection options start to dwindle.

I'm sure Starlink (maybe oneweb too?) and the WFH movement is going to change this equation quite drastically.

Here's an interesting RV internet set up.

https://wa9ace.net/2021/08/01/rv-internet.html

> When the demand for houses rises, Flatland metropolitan areas, which don't really have traditional downtowns, just sprawl some more.

And this is the driving force behind those cities going bankrupt, they're easy to build but not sustainable in the long term: https://www.youtube.com/watch?v=7Nw6qyyrTeI

Paul krugman has been wrong on almost everything

When you win a nobel prize in economics, I will listen to you more.

Hmm you might want to have a look into that particular "nobel prize" category

educate yourself

https://en.m.wikipedia.org/wiki/Argument_from_authority

There is no such prize.

There's a Sveriges Riksbank Prize in Memory of Alfred Nobel.

To be fair, it's still a yearly prize, for economics, awarded by the same Nobel Foundation that awards the other prizes, under the same rules as the other prizes. The laureates are announced at the same time as the other laureates, the awards are presented in the same manner as the others and everyone shows up to the same Nobel Prize Awards Ceremony.

And if we really want to go full pedant, the award isn't called anything in English at all, the real name is the "Sveriges riksbanks pris i ekonomisk vetenskap till Alfred Nobels minne"

But pedantry is silly, right?

'Sveriges Riksbank Prize in Memory of Alfred Nobel' is more or less a literal translation of the Swedish name, minus the part about 'in economic science' and whether or not you feel like translating the name of the Swedish royal bank.

Anyway, even the Nobel Foundation explicitly says it isn't a Nobel Prize:

> Not a Nobel Prize

> The prize in economic sciences is not a Nobel Prize.

https://www.nobelprize.org/nomination/economic-sciences/

It is an interesting detail, but I guess taht most most people will still refer to it colloquially as Nobel prize.

I think that point about the nature of the price doesn't diminish the point that was being made. As much as it is a call to authority, weight of opinion of someone rewarded with that price is bigger than random voice on the internet.

That being said I think this thread starting with unsubstantiated criticism of Paul Krugman ideas/opinions is not constructive and rather useless.

You were still wrong about the name.

Don't be a Dick[1]. Or even xkcd hat guy[2].

[1] https://dilbert.com/strip/2015-04-02

[2] https://xkcd.com/1475

Tell that to the Nobel Foundation:

> Not a Nobel Prize

> The prize in economic sciences is not a Nobel Prize.

https://www.nobelprize.org/nomination/economic-sciences/

This is in the same category as correcting people who say “this data.”

Yes, you’re technically correct. But also, you missed the point and are being self-defeatingly pedantic. The economics prize is valued for all the reasons the Nobel prizes are; they carry similar prestige and are thus used interchangeably.

> When you win a nobel prize in economics, I will listen to you more.

Henry Kissinger won the Nobel peace prize.

Sometimes they get it wrong.

So did Obama for withdrawing troops from Iraq and sending them to Afghanistan. Sometimes they get it really wrong.

> win a nobel prize

How long has it been since a nobel prize been anything more than a prize for being an influential leftist?

The most important thing Paul Krugman has proven is that even geniuses can be consistently wrong.

Yes this is a fascinating insight to the world - it's too complex for accurate prediction, you have to instead do preparation and adapt as events occur.

I'm not an admirer of many of the theoretical positions he takes, but he writes well and often in these kinds of posts he draws attention to considerations that not enough mainstream economists are paying attention to.

He's more often worth citing than other of the standard talking heads of economics like Greg Mankiw.

This is one of those things people just say like a tourette.

Only study that attempted to quantify pundit accuracy (I know about) found out that Krugman was the most accurate public pundit.

source: Hefferman, S., Klondar, E., & Tummarello, K. 2011. Are talking heads blowing hot air? An analysis of the accuracy of forecasts in the political media.

he is clearly right more often and about more things than most people, I dont understand the hate

From what I've seen, the hate is mostly because the things he says contradict the trickle-down bullshit right-wing and libertarian types tend to be steeped in.

> Just pity the countries that effectively don't have a Flatland, like Australia, the UK and NZ.

Ha! I see your "UK does not have flatlands" and I raise you Norfolk. V flat indeed

Oi think yew are mistakun boh. Narfuck dont have noe flatlands, oonlee the fens, en thas moostly linconshire boh.

Noel Coward and his fucking quips.

However, the fens is a sinking bog, so not great for building on, especially as its in the middle of fucking nowhere and 180 degrees of depressive grey most of the time.

but but but, its a good quote.

In the Zoned Zone parents paying for their children's education in house prices was one reason for price increases (prices in areas with good public schools skyrocketed).

The Two-Income Trap: Why Middle-Class Mothers and Fathers Are Going Broke (2004) https://en.wikipedia.org/wiki/The_Two-Income_Trap