08/07/2009 05:12 am ET Updated May 25, 2011

The High Price of Housing Whoha

It may come as a surprise to homeowners and developers now viewing block upon block of empty and unsellable houses and townhouses (or, in cities, floor upon floor of vacant condos), but apparently one of the main causes of the current housing crisis is that we didn't build still more new dwelling places for America's potential homeowners. That, at least, is the message of a new book from the American Enterprise Institute by Edward L. Glaeser and Joseph Gyourko. Seems that had it not been for government regulation, that perennial AEI bugabear -- in this case, in the form of local restrictions such as zoning laws and permit requirements -- the unfettered free market would have produced a so much larger supply of housing over the last decade that the bubble in housing prices would never have occurred.

Perhaps. But what strikes me as a far more potent contributor to the housing bubble and its ugly aftermath is quite another sort of misguided government action. I refer to the enthusiasm with which local governments repeatedly jacked up housing assessments in recent years, gleefully raking in the added property taxes they yielded.

This may have seemed like the proverbial win-win arrangement. Local authorities could meet expanding public needs while, at the same time, their politicians could avoid that horror of horrors in modern-day America, raising taxes! As for the public, they took pleasure in the apparently ceaseless rise in the value of their abodes, further confirmation of the wisdom of their investment, budget-stretching as it may have been.

Better still, the government-certified appreciation in their home's intrinsic worth conferred more than psychological benefits. With their boosted assessments as evidence, many a homeowner found mortgage lenders more than glad to refinance their homes as their inflated value, putting money in their pockets that they could spend in upgrading their dwellings or their lifestyles. Everybody was happy.

Now, as the New York Times reported last Sunday July 5, the bill for this mutual delusion is coming due. As hordes of now hard-pressed homeowners storm their precincts demanding cuts in property assessments, local governments gaze with horror upon the vast and growing hole thus produced in their treasuries and wonder which basic services they should next curtail.

Such is the price we pay for having, over the last 25 years, bought into the notion that cutting taxes is a costless benefit. The current pain Americans are now suffering is real and widespread. But sometimes it's a wee bit hard to feel too sorry for us.