It is well understood that it is land values that rise as real estate is speculated with and not the value of improvements. A heavy tax focused on land values would have prevented the rise of real estate values because as land values rose the tax would have increased taking all the incentive out of investing in real estate for the purpose of cashing in on the rapidly increasing land value. The story of massive borrowing to allow people to participate in the real estate speculation boom is only part of the explanation for the how the property market peaked and busted. The equally important explanation for the speculative rise in property values leading to inevitable bust is the failure of government to impose significant land values taxes.

In past depressions where property values fell dramatically the cities and states that had less drop off of property, i.e. land, values, were those jurisdictions that had significant property taxes which meant significant land value taxes. In those jurisdictions property/land values never rose so high because of the land tax and when the bust came the land values declined less than elsewhere. In those jurisdictions house prices never rose so high as to become unaffordable, less money had to be borrowed from banks and when the bust came fewer people lost their homes to foreclosure when property/land values fell below the balance of the mortgage.

The idea of stopping banks from making bad loans is laughable since the mechanism of real estate speculation guarantees bad lending when property values rise above values justified in the real economy. When speculative value comes on the scene it is criminal for banks to make loans backed by that value which can disappear overnight. This is what happened in Japan and they are still trying to recover from the early 1990 crash there. Tax policy to increase the tax burden on land values would be more effective to prevent real estate bubbles, would keep housing prices relatively low and stable over a very long time.