"The housing theory of everything"

 From Works in Progress:

Try listing every problem the Western world has at the moment. Along with Covid, you might include slow growth, climate change, poor health, financial instability, economic inequality, and falling fertility. These longer-term trends contribute to a sense of malaise that many of us feel about our societies. They may seem loosely related, but there is one big thing that makes them all worse. That thing is a shortage of housing: too few homes being built where people want to live. And if we fix those shortages, we will help to solve many of the other, seemingly unrelated problems that we face as well.

The obvious effects of expensive housing
Where you live affects nearly everything about your life – where you work, how you spend time off, who your friends and neighbours are, how many kids you can have and when, and even how often you get sick. Most people’s most valuable asset is, by far, their own home. And housing is so important for the overall economy because it determines the location and supply of the most important ‘resource’ of all: people.

There’s a growing consensus that housing is too expensive in most Western countries. In many places, the prices of new homes far exceed the cost of building more of them. Higher incomes in cities draw people to those places, who use some of their increased wages to bid up rents and house prices there. Easier credit and falling interest rates, which reflect a lower cost of borrowing and lower returns from other investments, have helped people bid up the price of housing as well. For most goods, including very expensive and durable goods like ships and airplanes, higher incomes and falling interest rates would cause supply to increase, instead of keeping the price permanently high. But for housing in and around many in-demand cities, supply has not been able to keep up with demand.

This is true across the developed world: Dublin, Singapore, Auckland, Paris, Vancouver, Rome, Hong Kong, Barcelona, Moscow, Cape Town, Zurich and many other cities have wildly expensive housing compared to the cost of building more of it. Costs are especially high in places whose economies are built on intangible capital, like software or financial services. In these kinds of industries, there are especially large benefits to people being near one another, because it makes them both more productive and more innovative. This is why the San Francisco Bay Area – probably the most productive place in the Western world – is also one of the most in-demand places to live. And that demand, plus restrictions on building more houses, is why it is one of the most expensive places to live as well.

This housing affordability problem has become much worse over the past four decades – coinciding with, and partly driven by, the growth of the intangible economy — the move towards production based on software and intellectual property, instead of machinery and other physical capital. In the 1960s, it was commonplace that a middle class single-earner American or British family would be able to afford a comfortable home.

When more people want to live in an area, we either build more homes to accommodate them or squeeze them in to the existing housing stock, with those people bidding up the price of living there. We can see all of these mechanisms in play in the Western world’s most in-demand cities. In London, for example, empty homes now make up only a few percent of the total, as it becomes more and more costly to leave something empty.

The most dramatic evidence of housing scarcity can be seen in price rises over the past forty years. Average New York City metropolitan area house prices are up 706% since 1980 (or 376% more than US consumer prices, and 326% more than US wages). For San Francisco the rise is 932%. London house prices are up over 2,100% in that period (or around 1,500% more than wages). Prices in Sydney, Australia, have risen by 1,450% (compared to hourly wage increases of 480%). In Ireland, prices have risen by about 800% in that period, driven by rises in Dublin in particular. Rents show similar, but less extreme, trends, because they are not directly affected by interest rates.

These prices range from about twice to four times the cost of building new homes of equivalent specification. This wedge, between build costs and house prices, is a rough proxy for how much extra cost is being driven by restrictions on new building.

By contrast, almost every other household product has become better and less expensive since then. Compared to 1975, the number of hours a median American worker would have to work to buy a television fell from 60 hours in 1975 to 7 hours in 2013; to buy a fridge-freezer, it fell from 65 hours in 1975 to 20 hours in 2013; to buy a manual exercise treadmill, from 18 hours in 1975 to 6 hours in 2013; and to buy a washer-dryer, from 67 to 30 hours. Even cars are three times ‘cheaper’ in terms of hours worked on an average hourly wage now than they were in 1964. And none of these estimates accounts for how much better most of these products are now than they were in 1975.

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So while other durable goods have become cheaper over time, housing has become more expensive. Even though incomes have risen, both parents in a family now typically have to work to afford a decent family house in a major city, and people have had to move farther and farther outside city centres to find somewhere they can afford to live, spending more time and money on commuting to and from work.

So the obvious effect of expensive housing is that people often spend a lot of their money on renting or buying their home, leaving them with less money to spend on other things, especially if they live in and around the Western world’s most wealthy cities. And the problem is getting worse.....

....MUCH MORE

Previously from Works in Progress:

Behavioral Economics: "We don’t have a hundred biases, we have the wrong model"

Tangentially related to today's reading:  

Why Real Estate Ownership Is Required For Intergenerational Wealth

We've looked at the importance of housing as a cornerstone of intergenerational wealth a few times, and not just for piles like this:

That's the courtyard of Arundel Castle, it's been in the fam (Fitzalans; Howards; Fitzalan-Howards) since the mid-1200's (with a few reversions to the Crown). More after the jump.....