How to contain housing bubbles

One cannot deny that housing bubbles can lead to nasty consequences, as shown in Japan, the US and Spain, for example. What can a policy maker do? Foremost, it is difficult to identify bubbles on the spot, and even in hindsight. Also, imagine the backlash when the government intervenes to rein in a booming industry. One thus needs a policy rule that kicks in automatically, or some policy that just reduces the volatility of prices. Natural candidates are transaction taxes and capital gains taxes for houses, and such taxes have been proposed not only for real estate markets, but also for financial markets in general (for instance, the Tobin tax).

Nicole Aregger, Martin Brown and Enzo Rossi exploits differences in such taxes across Swiss administrative divisions, as well as corresponding house price indices, to identify whether such taxes work. They do not. The capital gain taxes, especially those that apply to short-term gains, amplify prices movements. Why? Likely because house owners are reluctant to put their house on the market if such penalties apply, which drives prices even higher. As for transaction taxes, they have no impact whatsoever on price fluctuations. Thus such tax policies do not work, unlike you are willing to subsidize capital gains...