Here's a cause for the real estate bubble that I'd never heard before, via Russ Roberts at Cafe Hayek: bad tax policy. In 1997, Clinton signed into law a tax act which gave taxpayers a substantial exemption from the capital gains tax when they sell their home. Married homeowners filing jointly could pay 0% capital gains tax on up to $500,000 of the difference between the selling price and the buying price. This gave real estate investment an edge over salaried/wage labor – you could never get away with earning half a million dollars through a job and not paying any tax on it. It diverted resources in the economy towards real estate and away from other sorts of work and entrepreneurship. Chris Farrell at Business Week summed it up well in 2005:
The issue goes way beyond tax fairness. A growing number of economists are deeply concerned that residential real estate is absorbing far too many economic resources. Money is pouring into concrete foundations rather than high-tech innovation. "Residential investment accounted for 35% of private investment in the past year, a level not seen since the early 1970s," notes Martin Barnes, the perceptive financial-market observer at Bank Credit Analyst.
Upon reading this, my first inclination is to say that this might have been a more important impetus for the bubble than state intervention in housing through government-backed mortgage agencies.
This reminds me of an article that I read yesterday by Kevin Carson, founder of the vulgar libertarian watch. In it he argues that you cannot evaluate a policy in an "atomistic" way, but rather how it relates to other laws in a "dialectical" way. As it applies to this tax policy change, though the action – lowering real estate capital gains taxes – was a very libertarian thing to do if you look at it in isolation, the fact that the law left all other tax levels unchanged makes it an illiberal policy. When people decide how they're going to earn money, real estate speculation will receive more consideration in relation to working than it otherwise would it a totally free market.