# A law against selling any house cheaper than it was bought for, what consequences would that have?

I'm looking for a more general and principled answer and use Scandinavia today only as a sketchy example of the kind of scenario I'm asking about.

I live in Scandinavia where house prices has had an uninterrupted bubble boom during a quarter of a century now. Households are the most indebted in the world. Mostly of course in the form of housing loans. If the housing bubble would burst in Scandinavia as it has done in many other places the recent decade, certainly all banks will immediately be wiped out and millions of Scandinavians will become completely destitute for the rest of their lives with unpayable debts and no property to match it as a deep depression sets in.

Some key figures (for Sweden, not the oil country):

• +7% housing prices on average per year since 23 years, with record increases the last couple of years.
• 0% growth in GDP per capita last 10 years (housing prices doubled anyway).
• 1.2% (positive) CPI-inflation since 10 years.
• 0.8% (positive) consumer housing loan now offered in ads without negotiation (after tax deduction) while central bank interest rates are stuck deep into the negative.

Imagine that the government makes a law that forbids anyone to sell any housing at a lower price than what it was last bought for. Thus per definition the house bubble cannot burst, not legally anyway. And everyone is safe, the crash prevented and everyone will keep making millions simply by borrowing more for risk free "investing" in simply owning ones own house, right?

What would the negative consequences be and how would it play out?

• I am not sure how this would work with receivership. If you can't sell it, you can't liquidate it-- so what happens when you go bankrupt? You can't force someone to buy it for more than they want to pay, and you can't force someone to hang on to a property (and continue to pay property tax on it) if they're broke. – John Wu Mar 21 '17 at 18:06
• A lot less houses will be sold. The alternative to selling at a low price isn't selling at a high price, it's not selling. – immibis Mar 21 '17 at 22:17
• I do not understand why do you think that if someone can't sell something at X, it should cost more than X. Imagine that you bought a vase for 10k but can't sell it below 1M. This does not mean that you suddenly became 100 times more rich. On the contrary, if you really need to sell it, it means that you are screwed and lost 10k. – Salvador Dali Mar 21 '17 at 22:41
• Just look at Detroit. That's what will happen. – Michael Hampton Mar 22 '17 at 2:40
• It would be simpler and more direct to pass a law against being destitute. While you're at it, raise the minimum wage to $10,000 an hour and make everyone insanely rich. – Greg Taylor Mar 22 '17 at 11:03 ## 10 Answers One of the worst ideas I have ever heard. All negative consequences, almost no positive ones. ANY attempt by government to restrict prices (whether by floor or ceiling or anything else) ALWAYS has perverse bad effects; it always causes worse problems than the problem it is trying to solve. A free market works best when all members of the market are FREE to decide what price they are willing to pay, or receive, for a particular good. Government sticking its nose into that transaction always makes at least one participant in the transaction worse off, usually both, and the economy as a whole always suffers. It's like a politician on campaign promising "I will reduce taxes, increase government spending, and reduce government debt!" That never works, EVER. • Bad answer, but I can't downvote. Price controls are sometimes necessary, but they still don't work in this case. – Joshua Mar 25 '17 at 14:45 • I do not think the statements "NY attempt by government to restrict prices (whether by floor or ceiling or anything else) ALWAYS has perverse bad effects" [acording to which welfare criterion?], or " the economy as a whole always suffers" can be rigorously defended. – Ubiquitous Mar 25 '17 at 17:31 • Any action has perverse bad effects. While this idea is not good, – prosfilaes Mar 26 '17 at 0:50 • You haven't backed up any of your statements with any sort of logical analysis, documentation, or authoritative reference. What you've written just a rant. – Hot Licks Mar 26 '17 at 2:01 A point that doesn't yet seem to have been made is that banks and other mortgage lenders would have to stop lending as soon as such a law was proposed, never mind enacted, and that would in itself cause the housing market to collapse. A bank will lend you €320,000 to buy a €400,000 house because they know that if you default on your payments and they have to repossess the house, they can recover the loan value by selling the house, even if they can't get as much as you paid for it. That's why you (usually) have to put down a deposit for a certain percentage of the purchase price, and the bank won't lend you the full amount. If they're not allowed to sell it for less than €400,000, even though they only need to recover €320,000, then they may well be unable to sell it at all and be stuck with both an unpaid loan and an unsellable house. (Yes, I know that Sweden doesn't use the euro, but it's more concise and more widely applicable to use euro as the currency in my example.) Bursting bubbles don't destroy actual wealth. Instead, they stop destructive processes which convert actual wealth into imaginary wealth. Suppose it would cost \$120,000 to build a house that's would be worth \$100,000 in non-bubble conditions,but market conditions in a bubble would cause such a house to sell for \$150,000. Building a house under such conditions would convert \$120,000 of actual wealth into \$100,000 of actual value plus \$50,000 of imaginary wealth. If the builder manages to sell the house for \$150,000 that will mean the buyer traded \$150,000 of real wealth for \$100,000 of real value and \$50,000 of imaginary wealth. As long as the bubble lasts, people can keep passing the imaginary wealth around and pretend it's real wealth, but there's no way to turn such imaginary wealth into real wealth. The act of building the house will have destroyed \$30,000 of real wealth, and no matter how much higher prices might go in the bubble, total net profit among all buyers and sellers (assuming for simplicity nobody does anything with the house except buy and resell it) will be -$30,000. Any profit anyone might make buying and selling the house will be offset dollar for dollar by a loss by someone else down the line. While it may look like bursting bubbles cause people to lose money, the reality is that it's the formation and inflation of bubbles--where it looks like people are making money--that actually destroy wealth. As the bubble gets bigger, both the amount of imaginary wealth created and the amount of actual wealth destroyed are prone to increase exponentially. Although the bubble going may protect some market participants from losses, it can only do so at the by causing other market participants to lose even more. • This is essentially what a Pyramid Scheme is. Many financial and insurance systems are based on it. But as people live longer and have more expenses, these systems fall apart. For example Social Security and health insurance in the US. – user12110 Mar 24 '17 at 12:20 • @nocomprende: Yup. The key point is that the real wealth disappears while the bubble is growing, so trying to keep prices up will do nothing to protect it. – supercat Mar 24 '17 at 14:24 • The game of Musical Chairs would work if the music never stopped. Thank you for explaining how wealth is actually 'destroyed' in this situation, I could never comprehend that before! – user12110 Mar 24 '17 at 16:10 • @nocomprende: I've very seldom seen things described in such terms, but the fundamental problem with bubbles is that they shift resources away from producing things whose value would exceed the production cost, to things whose real value is below the production cost. Wealth is destroyed the moment the resources are committed to the latter items. I like the musical chairs analogy; perhaps someone is replacing groups of two ordinary chairs for one fancy-looking one. While the music is going, everyone thinks this will be a good change for them since they'll get a fancy chair instead of... – supercat Mar 24 '17 at 17:04 • @nocomprende: Speculators who gamble with their own money will either make markets function more efficiently, or will lose an amount of money that exceeds the harm they cause to the market. People who speculate recklessly with their own money may damage the market a little bit, but they'll run out of money before they damage it very much. The real problems arise when people are allowed to place bets that they can't cover, which effectively means they're playing with other peoples' money. There's no limit to the mischief that can cause if it's not punished severely. – supercat Mar 24 '17 at 23:11 This would be a catastrophically bad idea. The next time the economy turns down, what happens? Workers who own houses for which they cannot find a buyer at the same price they paid for the house, will be unable to move house. They will therefore be unable to take up employment elsewhere. So you have compounded an economic downturn with an artificial restriction on the local availability of the staff that a company might wish to hire! I can't imagine any other move that might make it harder to recruit staff as a recession bites and unemployment rises. Surely, anything which restricts labour mobility within a nation's borders can only be a bad thing. It should therefore be as easy as possible for someone to sell a house in one location and buy a house in another, as the government can make it. Here in the UK, we have a silly tax on house purchases called stamp duty. One consequence is that it typically costs one 3% of the purchase cost of one's house, to re-locate. Therefore, it is an incentive to stay put, rather than respond to an offer of a better-paid or more desirable job elsewhere. Or, if an employer is desperate to recruit, it will have to somehow compensate its new recruit for that person's tax burden when he moves. Back to this crazy idea: if one cannot sell one's house because nobody will pay the previous price, and it's illegal to cut the asking price, then the only legal option will be to rent it out instead. So you will create a nation of amateur landlords, mostly handling matters badly because they don't want to be landlords at all. I also imagine that insurance on houses will become several times more expensive, if not completely unobtainable, because there's one obvious way to get one's money out as cash. Insure the house for its previous purchase price / legally mandated minimum "worth", and then arrange for it to burn down. Price is the thing that balances supply and demand, if you fix prices artificially low then you create supply shortages. If you fix them artificially high you create demand shortages. So people who want/need to sell their houses in an area where demand has dipped would be unable to do so. Even in areas where natural demand had not dipped buying a house would become a much ricker proposition further depressing demand. I suspect that the net result of all of this is that houses throughout the country would quickly become unsellable. There would likely be an explosion in the rental market as unsellable houses get rented out instead. Banks would have to develop new departments to handle renting out the unsellable properties they reposessed The government would have to figure out what the heck to do about valuing unsellable houses for inheritance tax purposes and what to do when the remaining assets of the owner were not enough to cover the inheritance tax. • But each and every house in Sweden is very much more expensive now than it was 20 (or 2) years ago. It's more here and less there, but there exists no area that's in less demand than before. Automatic profit from maximizing ones own debt at ever diminishing interest rate, and the guarantee that every house bought never could result in a loss. Banks don't need to sell or rent our empty houses, their legal minimal valuation remains intact on the balance sheet. And in no case did that legally minimal valuation decrease, since it never was sold for a price lower than the debt it was mortgaged for. – LocalFluff Mar 21 '17 at 22:16 • @LocalFluff That's not what the question is asking though. The question is asking what will happen if you force prices to be high when they would otherwise be dropping. – immibis Mar 21 '17 at 23:19 And everyone is safe, the crash prevented and everyone will keep making millions simply by borrowing more for risk free "investing" in simply owning ones own house, right? It is true, your investment cannot drop in nominal value (not counting inflation,) but it can become totally illiquid, which is worse in many ways. You see, if a stock drops in value by 5%, I can sell and take the 5% loss, freeing and preserving 95% of my capital. If a house in your scenario drops in value by even .05%, then I cannot cut my losses. From a short-term perspective, any loss at all becomes a total loss. From a long-term perspective, any loss is still magnified, since you can't free your capital for better investments - the opportunity cost is high even if you manage to sell later. Either way, the risk of real estate investing would rise dramatically. This will increase the cost of home ownership. Of course, that's speaking abstractly. In reality, houses make up a huge portion of most people's net worth and that's the real danger of illiquidity in the housing market. Imagine not being able to move, not being able to refinance, only being able to free yourself of your investment by means of a total loss. That's not going to work for many people. These people will have to rent instead of owning, which will increase demand (and price) for renting. Once this all settles out, people will no longer consider real estate to be a 'safe' investment, although con artists and deceivers may succeed in swindling people for a while. Tl;Dr • The inability to sell a depreciated asset increases the risk of that asset. Increasing risk increases cost, so you'd see home ownership increase in cost as well. That's bad. • Renting would become more attractive by comparison to home ownership, so you'd see demand (and price) rise for renting. That would be very bad for low income families. • Ironically, this law and its fallout might disabuse people of the notion that real estate is a 'safe' or 'guaranteed' investment. That would be good. Finally, the only people that I think will truly benefit are the large companies which would be able to handle the risk of home ownership in this scenario, because they will have less competition. • You rightly identify that there would be effects on the demand for rented homes. What about effects on the supply of rented homes? You need to consider both sides to justify the conclusion that rents would rise. – Adam Bailey Mar 21 '17 at 21:39 • How does it really connect, or play out, that an asset could become depreciated if it is impossible to sell it at a depreciated price? If a broker finds (or if they find each other on social media) A, B and C such that A wants to move to B and B to C and C to A, and each of them adds$100,000 to their purchasing prices. It is just a roundabout and everyone involves and the bank all profit from it. No risk for any crash. Wouldn't my suggested law make safe that which is now a fear and a real threat? – LocalFluff Mar 21 '17 at 21:43
• @LocalFluff 1. ABC switcheroos like you just described are utterly unfeasible. If you cannot see why, then I can only assume that you have never tried to sell a house. If you have and still think that way, then I can only assume that you were unbelievably lucky with your sale. 2. If you raise your price 100K and also pay an additional 100K, then you have earned NOTHING. The bank alone profits, since their fees are now higher. 3. No, your law does not protect the market and makes any downturns far more catastrophic. See my answer or any of the other good answers as to why. – Jeutnarg Mar 22 '17 at 0:48
• @Jeutnarg Total housing supply is fairly inelastic, as you say. But housing that has been owner-occupied and has become unsellable could become available for rent if no longer required by its owner, eg due to moving, or following death. So the supply or housing for rent would probably increase. – Adam Bailey Mar 22 '17 at 10:57
• @LocalFluff You're correct that scams and tricks of the type you describe might mitigate some of the harm this rule would do. But the cost of having to go through such machinations would significantly drag down the value of real estate. – David Schwartz Mar 22 '17 at 22:45

There will be a rapid rise in artificial schemes to get round the letter of the law. For example, an agent may charge you 90% of the minimum legal sale price to officially register your house as uninhabitable and obtain a compulsory demolition order for it. A new house built on the same site would not have any previous price history, so it could be sold for say 10% of its true market value, plus a large one-time charge (non-negotiable, of course!) for a "new-building insurance policy" or some such terminology.

Exploiting such loopholes in the law won't necessarily benefit the bulk of the population, but they would benefit the minority with the expertise to create the work-rounds - there will always be some property owners for whom taking a financial loss is a better option than not being able to sell at all, who can be exploited.

• In Sweden the government since years is already desperately trying to get some temporary container houses built and to force small garden house owners to rent them out. But nothing of that has worked, because 50 year old "ABBA"-regulations require top quality only of all housing everywhere at any cost always everywhere with no regard to anything else. The only thing being built are a few luxury houses and a concert hall (and thousands of gypsy tents). You can safely ignore the possibility of an increased housing supply! The laws truly have enormous effect, they cannot be ignored by anyone. – LocalFluff Mar 21 '17 at 22:07
• If you want top quality, you must pay for it. There is an old saying: "You can't legislate morality." Or, quality. – user12110 Mar 24 '17 at 12:27

If the housing bubble would burst in Scandinavia as it has done in many other places the recent decade, certainly all banks will immediately be wiped out and millions of Scandinavians will become completely destitute for the rest of their lives with unpayable debts and no property to match it as a deep depression sets in.

Firstly, it's not that bad, provided you have functioning central banks to bridge the banks' credit position.

But consider what normally happens when people are unable to make loan payments: the bank eventually repossesses the house and sells it on. Often for a discount because they're in a hurry to convert it back into capital. Now suppose they're unable to sell it due to price regulation laws, but the market has collapsed. What happens? The bank is stuck. They need capital to make loans, but they have houses instead. They still need bailing out.

(Note: if you jack up inflation to double-digit percentage, suddenly the house resale price law becomes less of a problem.)

In the end, you may end up having to demolish the houses. Don't forget that houses, unoccupied, are a wasting asset: they require maintenance. The extreme case of this is probably Detroit.

So one extremely likely outcome of your minimum resale price law is that habitable houses get demolished because they cannot be sold at their minimum price.

• Instead of demolishing the houses, the banks would simply hold them empty since they cannot legally sell them. It doesn't hurt their balance sheets at all since the government, with the force of law, guarantees that they never can be sold at a loss. Best bad loan ever! Just let it sit there on the balance sheet. Houses empty or not, who cares? The crash was avoided, my law succeeded. Maybe the bank could rent them out at corresponding 0.8% mortgage rate. Where else would people try to live? Sweden is a cold rainy place. – LocalFluff Mar 21 '17 at 21:49
• @LocalFluff So you're a bank with \$10M of houses that you can't sell, and \$10M of debts you need to pay to not go bankrupt. And you can't sell the houses to pay the debts so you go bankrupt. And then you give the houses to your creditors who are like "wtf am I supposed to do with these houses?" because they're now in the same position you just were (before you went bankrupt). – immibis Mar 21 '17 at 23:17
• @LocalFluff ^^^ what immibis is describing is called a 'toxic asset' Toxic assets are very, very bad – Jeutnarg Mar 22 '17 at 0:50
• @LocalFluff "crash was avoided" not necessarily - as Venezuala are discovering, if you impose price controls then suddenly the market stops functioning instead. You'd probably end up with an explosion in the 99-year-lease market to hack around it. – pjc50 Mar 22 '17 at 9:37
• Anyway, the key concept is market clearing: it doesn't matter what you set the price to if people aren't willing and able to buy at that price. – pjc50 Mar 22 '17 at 10:02

Mandating a house be sold at last price sold does not mean that people value it at that sticker price. I could mandate that water bottles only be bought for $1,000,000. This does not mean anyone would buy. I'd just be stuck with a bottle that I don't value. Similarly, setting price floors on the housing market would mean many owners will be stuck with homes. It's also important to note that the market devaluation of a home only matters to owners that are planning on selling. If I bought a house for \$200k and the market crashes the day after, I still VALUE the house at some amount > \\$200k. It does not matter to me that the market price is lower because I still have the exact same home. If anything, permanent home owners should really like the idea of homes being devalued because it means lower property tax liability.

Sure, bubble bursts tend to have adverse effects on many other markets. But these are separate issues altogether.

A previous answer has already covered the emerging black market. This also happens in NYC with low-income housing regulations.

• Whenever did you hear a macro economist use the word "value"??? No, they are cash counters. Bookkeepers of "economic activity". But what I try to ask here is if a housing debt bubble crash wouldn't be made impossible if no one could sell his house to a lower PRICE than it was bought for? Regardless of values. And if it is bad, what bad things would happen? – LocalFluff Mar 21 '17 at 21:27
• I work in macroeconomics and we talk about "value" a lot. On a quick count, the word "value" appears 1659 times in the Australian System of National Accounts manual, i.e. about 3x/page. Importantly, such "values" are based on consensual transactions - i.e. what people are actually selling for. If nobody wants to buy your house for a million dollars, then its value isn't 1m no matter what the law says. – Geoffrey Brent Mar 23 '17 at 0:01
• If the law passes, you can be sure that mortgage lenders would institute a kind of margin call for the loans. – Mindwin Mar 23 '17 at 15:00

That would be really, really bad.

Any house that loses value will be unsellable, and thus virtually worthless.

Most people living in such a house would be prevented from moving. They cannot sell it, since no one wants to buy an overpriced house, and they cannot afford buying another house with their capital already tied up in the current house.

A black market would appear, with people giving money back under the table. "Buy my house for 4M SEK and I'll refund 1M SEK under the table."

I can tell you one thing it won't do. It won't stop prices from ever falling.

• This is a good answer but I find that the last sentence greatly detracts from it. "It won't stop prices from ever falling." What prices? Official or black market, of a given house or of a general category of houses, etc? I think you need to be clear on this because the official price of a given house would obviously not fall. – Giskard Mar 21 '17 at 13:16
• @LocalFluff If people are prevented from moving to cheaper housing, then there will be personal bankrupcies and those houses will end up with the banks. So bank loans won't be risk free. – Klas Lindbäck Mar 21 '17 at 14:40
• @LocalFluff A banker loans money because he believes he can get the bank's money back, plus interest. So he makes the borrower put up 20% of the price of the house as a down payment, knowing that in case of foreclosure in a down market, he can sell the house at 80% of appraised value and still get his money back. By making that illegal to do, you just killed the home mortgage market. And that means no home-improvement loans, which help to bolster home prices. Congratulations! Your economy is dead. – Monty Harder Mar 21 '17 at 19:58
• @LocalFluff The value for the bank of a house is whatever it can be sold for. If the house can not be sold the value is zero. – Taemyr Mar 22 '17 at 11:03
• @Taemyr re: "If the house can not be sold the value is zero." - actually, the value is worse than 0 (at least for any owner not living in or renting it). A house has to be maintained and have property taxes paid; for a bank the costs also include having someone manage these toxic assets (I have a friend with this job in the US). – brichins Mar 22 '17 at 20:48

## protected by GiskardMar 22 '17 at 15:58

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