NCPA - National Center for Policy Analysis


April 19, 2005

Americans are over-investing in tax-preferred housing as a store of value and accumulating wealth in a highly illiquid and potentially risky way, says the American Enterprise Institute for Public Policy Research (AEI).

  • Residential real estate has surged in value by 44 percent, over 10 percent per year, since 2000, very much like the rapid run-up in high technology stocks from 1996 to 2000.
  • The measure of household net worth as a multiple of personal disposable income, which includes the value of real estate holdings, has risen to 5.4, not far below 6, the level seen at the peak of the stock market bubble; the average ratio was 4.5 for most of the 1980s.

According to AEI, housing does not add as much to labor productivity as more traditional capital does:

  • So the rush of savings into housing raises questions about the durability of America?s decade-old rise in productivity growth from about 1 percent to about 2.5 percent annually.
  • A drop in U.S. house prices would sharply reduce U.S. consumption, the world?s major source of demand growth.

Just like the tech-stock bubble, the growing real estate bubble is bound to pop. The President's Tax Reform Commission should consider a gradual transition toward a consumption-based tax system that favors all forms of savings, not just housing. By taxing all saving only once, rather than twice as the current income tax system does, a consumption-based tax would encourage more U.S. saving in all forms while reducing the risk of disruptive real estate bubbles, explains AEI.

Source: John H. Makin, "Should Americans Save More?" American Enterprise Institute for Public Policy Research, Economic Outlook, March 2005.

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