We recently came across a paper by Randall O’Toole, in which he argues that the housing bubble was largely caused by growth control regulations. He points out that places without it did not experience the extreme sort of bubble collapse like what occurred in California and Florida. See Randal O’Toole, How Urban Planners Caused the Housing Bubble, Cato Institute, Policy Analysis 646, October 1, 2009. See http://www.cato.org/pub_display.php?pub_id=10570
Sounds reasonable to us, and O’Toole is not the first one to note this. The phenomenon of stringent land-use regulation causing large, rapid increases in housing prices, notably in California, was described by William A. Fischel, an economist from Dartmouth, in his book REGULATORY TAKINGS: LAW ECONOMICS, AND POLITICS (Harv. U. Press 1995), particularly in Chapter 6, entitled Capitalizing on Land Use Regulations: Evidence from California, pp. 218-252. Check it out.
Our favorite part of O’Toole’s piece is his recollecton of the 2005 statements by Alan Greenspan and Ben Bernanke to the effect that there was no bubble and that one did not need to fear its bursting, although Greenspan fudged a bit by taking note of some “froth” in the economy. Froth, as you will recall, is a bunch of small bubbles.
Afterthought. We should mention that two Presidential Commissions on Housing also concluded that the NIMBY phenomenon has been a factor in limiting housing supplies, thus contributing to the rise in the cost of new homes.