Eight intractable problems in housing today

Many of today’s problems in housing result from policy changes and emergency measures instituted to minimize the damage from previous housing bubble.

House prices can only rise with wages on a sustainable basis. While policymakers can tamper with mortgage rates to influence affordability in the short term, over time, mortgage rates revert to their long-term mean, and as a result, wages become the only long-term influence on market prices.


Market prices for houses represent an agreement between generations. For one generation to benefit to a greater degree than their productivity and income growth warrant, the powers-that-be can inflate house prices through lowering mortgage interest rates, and for the Baby Boomers, this occurred. (See: Housing market impact of 25 years of falling mortgage interest rates)

So what does that leave for the next generation? Well, the immediately subsequent generation to the Baby Boomers, the so-called generation X, is trapped underwater, surviving on loan modifications, and rooting for higher house prices so they can escape without a loss. The following generation, Millennials, faces problems with low income, high debt levels, and a lack of desire to pay sky-high house prices to enrich the Baby Boomers. As a result, aggregate housing demand is low, 10% to 15% below historic norms, and the housing market struggles to keep the old housing bubble reflated.

Some of the problems with housing today are intractable, and unless housing policy changes, many of these problems will be with us indefinitely.HELOC_abuse_Patty_Hearst

The immoral housing bubble

Britain’s property market is an enemy of democracy.

By Amol Rajan, 8/10/15

… because houses are meant to be homes too, everyone is forced to sign up to participate in this racket. It is daylight robbery by another name, but all of us are in on it.

The phrase “property-owning democracy” is usually attributed to Noel Skelton, a Scottish Unionist MP of the interwar years. He saw property and democracy as causally linked: citizens who owned the roof over their heads would feel more deeply invested in their surrounding neighbourhood, having a sense of pride, responsibility and attachment that the looser connection of renting fails to generate. Private control of houses would, by a pleasing inversion, increase public solidarity.

These same delusions about homeownership and societal stability drives most of the policy decisions in the United States as well. The idea of owning a house is synonymous with the American Dream.


Fatally, however, New Labour’s support for property ownership combined with other economic factors to create one of the most remarkable booms in financial history. Booms are by definition unsustainable; this one is no different, but a lot of people have got very rich in the process, often taking on levels of debt so astronomical that no government would dare jeopardize the upward trajectory of house prices.

What’s worse here in the United States is that our government fails to see a reason to limit the inflation of house prices; in fact, over the last 8 years, everyone from government regulators, to the federal reserve and Congressional policymakers conspired to elevate house prices as quickly as they can and as high as they can.

The faulty assumption behind these manipulations of the housing market is that house prices crashed from a sustainable level and these stable prices must merely be restored. In reality, the crash restored normal and sustainable house prices, and the manipulations reflated the old bubble. Are the reflated prices any more stable? Let’s hope the 30-year mortgages with super-low rates provide a solid foundation.bullish_on_real_estate

This glaring injustice, in which asset owners are able to pull ever further away from those who don’t own assets, not by their industry or entrepreneurial zeal but just because they had money to begin with, has become not just a defining feature of the society in which we live, but the defining feature. You can surmise that from the fact that several of the most urgent moral challenges of our time have their roots in the economics of housing.

Here, just for starters, are six of them. Each deserves an essay on its own, of course; but for now, I wish to propose that all of the following have a shared fundamental cause in our housing crisis.

1. Inequality

Nothing — nothing — has done more to increase inequality in modern Britain than rampant property inflation. The rich own assets; the poor often don’t. The rich are able to pull away even if they sit idle, just by investing in property. If you have a spare million, why bother working? Invest smartly in London property and you can make a £100,000 in a year by doing nothing.

During the housing bubble, many markets witnessed home values increase at a rate equal to the local median income. It was as if their home was another breadwinner, and the lure of this easy money was too much for many to resist. The rampant, in-your-face, marketing of these loans in every available media outlet touting the glossy “lifestyle” of over-the-top consumerism was a drug to many spending addicts.

Also, during the bubble rally people really believed their house values would go up forever, and they would always have the ability to refinance enormous debts at low interest rates and maintain very low debt service costs. few_dollars_moreMost people did not think it possible they would end up in circumstances where they would lose their homes; however, they were mistaken. Given these beliefs, the equity accumulating in their house was “free money” they just needed to access in order to live and to spend like rich people. Even though they were consuming their net worth, and making themselves poor, they believed they were rich, and they wanted to spend accordingly.

2. Work is no longer the route to wealth

It used to be that people with an above average education could expect an above average salary and therefore have an above average quality of life. No more. Yes you can get above average salaries; but if you want a really good life — which may include a lovely home in a safe, leafy, reasonably central area — you will struggle to get one through work. You have to speculate to accumulate. This fracture in the connection between work and wealth is almost unimaginably consequential. Blame housing.

Has this become true in the United States as well? Can you earn your way to prosperity, or is asset speculation now required?

3. The end of saving

Conservatives are supposed to prize the idea of saving. It involves deferred gratification, and a stronger connection between generations. But with interest rates extremely low, houses have become pensions. Rather than put aside funds every month, people are taking on huge debt to invest in housing, knowing they’ll get a much better return that way.

Here in America, the federal reserve strongly encourages this kind of speculation, despite the immorality of stealing money from seniors on fixed incomes to bail out the banking sector.


4. Inter-generational injustice

Because young people, and especially poor young people, can’t get a home unless they inherit, they are watching older asset owners pull ever further away from them. Inflation in house prices on the scale we now see amounts to a phenomenal transfer of wealth from the young to the old.

You won’t see the Baby Boomers complaining about this problem….


5. Planet London

Everyone knows that London is becoming less and less like the rest of Britain. Immigration is a major driver of this. But housing is the main cause. Whereas house prices rose by an average of 19 per cent in London last year, they fell in many other parts of the UK — by 1.1 per cent in the North East, for example. This fuels the sense of grievance felt by the majority of Britons who don’t live in our capital.

5A. Planet Coastal California

Coastal California real estate follows its own rules. Due to our chronic shortage of supply (See #7 below), Kool-Aid intoxication (See #8 below), buyers are forced to compete with each other for houses, and prices get bid up to levels most people can’t afford.

6. Delayed marriage and parenthood

One of the most extraordinary social changes of recent decades is that Britons are getting married and having kids later. In 1981, the average British woman got married at 23.1. Thirty years later, it was 30.1. For men, it has risen from 25.4 to 32.1. This is an astonishing development for so short a period. Partly it is driven by positive developments, such as many more women entering the workplace. It is also driven by a cultural endorsement of freedom, and the idea that we can delay adulthood and commitment for longer. But economic factors determine this more than anything: and the fact that it takes many more years to get a deposit for a house together is not a good thing. Watch out for companies paying women to freeze their eggs, and rates of fertility treatment rising, to meet this delayed marriage and parenthood phenomenon.

We are also seeing a delay of marriage and children here in the US. Nobody is certain why this is occurring, but the same factors that prevent Millennials from buying houses (low saving, high debt, shaky income) are also likely preventing Millennials from getting married and having children.

7. Chronic shortage of supply

When any commodity is in short supply, prices tend to rise; houses are no exception. Beginning in the 1970s, California produced more high paying jobs than it did houses. As a result, there were not enough houses to go around, so people began substituting down in quality to obtain a place to live. This downward substitution effect lifts house prices at every level of the housing ladder and prices out the lowest tier of the housing market.

This phenomenon has been going on for so long, that most Californians resign themselves to the idea of living in lesser quality housing than they could obtain elsewhere based on their income.

8. Kool-Aid intoxication

When house prices are grossly inflated and it’s much cheaper to rent than to own, why do people still buy houses? Is the emotional desire to “own” so strong that it compels ordinarily wise people to make foolishly irrational decisions that leave them penniless?

No, the desire to “own” is not that strong; however, the desire for free money is. When people overpay for a house, they generally don’t believe house prices could go down, and they strongly (mistakenly) believe house prices are going to rise strongly forever. This problem emerges, goes dormant during a crash, but then reincarnates with each generation.


I don’t hold out much hope, and if the moral case for addressing our housing crisis fails to find support in Westminster, I don’t imagine the intellectual case for how to fix it will prove popular either. But it is patently obvious that if one object of taxation is to incentivize socially beneficial behavior, and disincentivize socially costly behavior, Britain has to shift the burden of taxation from work to unearned wealth — that is, land and property.

When I think back to the repulsive behavior of HELOC abusers and speculators during the housing bubble, one of the worst features was the free money. Ordinary people were given hundreds of thousands of dollars for doing absolutely nothing. Sure, they believed they earned it due to their brilliant financial acumen (they bought in a bull market), but despite their prowess, the reward was always out of alignment with the effort and risk required — which is also why it was so popular.

America should consider raising capital gains taxes and eliminating the exclusion of personal residences to curb this kind of foolish speculation.

Housing policy has little to do with rationality and reason, and everything to do with hypocrisy, cynicism, and injustice. The dream of a property-owning democracy long ago turned into a nightmare, and it seems painfully clear that this all-consuming boom will go on until there is an almighty crash, leaving the debris of countless shattered hopes in their wake. This is the abysmal truth about the greatest scandal in modern Britain. We have an economy built on a property bubble, and a political class who need to get re-elected long before that bubble goes pop. By then it will be someone else’s problem — our children’s.

California and Great Britain have much in common with regards to its real estate. California has witnessed three catastrophic bubbles over the last forty years as has Great Britain. Each bubble had different causes, but the timing was similar. California has strict land-use controls which creates artificial shortages of housing, and so does Great Britain. California’s economy has become dependent upon rampant HELOC abuse to fuel unsustainable booms and heart-wrenching busts.

The one key difference between California and Great Britain is that some in Great Britain see the folly in what they do and are proposing methods to end it. Here in California, we sit and wait for the next house price party.


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