Apr 30, JDN 2457874
It’s not your imagination: Housing is a lot more expensive than it used to be. Inflation adjusted into 2000 dollars, the median price of a house has risen from $30,600 in 1940 to $119,600 today. Adjusted to today’s dollars, that’s an increase from $44,000 to $173,000.
Things are particularly bad here in California, where the median price of a new home is $517,000—and especially in the Bay Area, where the median price is $838,000. Just two years ago, people were already freaking out that the median home price in the Bay Area had hit $661,000—and now it has risen 27% since then.
The rent is too damn high, but lately rent has actually not been rising as fast as housing prices. It may be that they’ve just gotten as high as they can get; in New York City rent is stable, and in San Francisco it’s actually declining—but in both cases it’s over $4,000 per month for a 2-bedroom apartment. The US still has the highest rent-to-price ratio in the world; at 11.2%, you should be able to buy a house on a 15-year mortgage for what we currently pay in rent near city centers.
But this is not a uniquely American problem.
It’s a problem in Canada: Housing in the Toronto area recently skyrocketed in price, with the mean price of a detached home now over $974,000 CAD, about $722,000 USD.
It’s a problem in the UK: The average price of a home in the UK is now over 214,000 pounds, or $274,000 (the pound is pretty weak after Brexit). In London in particular, the average home now costs nine years of the average wage.
It’s even a problem in China: An average 1000-square-foot apartment (that’s not very big!) in Shanghai now sells for 5 million yuan, which is about $725,000.
Worldwide, the US actually has a relatively low housing price to income ratio, because our incomes are so high. Venezuela’s economy is in such a terrible state that it is literally impossible for the average person to buy the average home, but in countries as diverse as France, Taiwan, and Peru, the average home still costs more than 10 years of the average household income.
Why is this happening? Why is housing so expensive, and getting worse all the time?
There are a lot of reasons that have been proposed.
The most obvious and fundamental reason is basic supply and demand. Demand for housing in major cities is rapidly rising, and supply of housing just isn’t keeping up.
Indeed, in California, the rate of new housing construction has fallen in recent years, even as we’ve had rapid population growth and skyrocketing housing prices. This is probably the number one reason why our housing here is so expensive.
But that raises its own questions: why aren’t more houses getting built? The market is supposed to correct for this sort of thing. Higher prices incentivize more construction, so prices get brought back down.
I think with housing in particular, we have a fundamental problem with that mechanism, and it is this: The people who make the policy don’t want the prices to come down.
No, I’m not talking about mayors and city councils, though they do like their property tax revenue. I’m talking about homeowners. People who go to homeowners’ association meetings and complain that someone else’s lopsided deck or un-weeded garden is “lowering property values”. People who join NIMBY political campaigns to stop new development, prevent the construction of taller buildings, or even stop the installation of new electrical substations. People who already got theirs and don’t care about anyone else.
Homeowners have an enormous influence in local politics, and it is by local politics that most of these decisions about zoning and development are made. They make all kinds of excuses about “preserving the community” and “the feel of the city”, but when you get right down to it, these people care more about preserving their own home equity than they do about making other people homeless.
In some cases, people may be so fundamentally confused that they think new development actually somehow causes higher housing prices, and so they try to fight development in a vain effort to stop rising housing prices and only end up making things worse. It’s also very common for people to support rent control policies in an effort to keep housing affordable—and economists of all political stripes are in almost total consensus that rent control only serves to restrict supply, increase inequality, and make housing prices even worse. As one might expect, the stricter the rent control, the worse this effect is. Some mild forms of rent control might be justifiable in particularly monopolistic markets, but in general it’s not a good long-term solution. Rent control forces rationing, and often the rationing is not in favor of who needs it the most but who is the most well-connected. The people who benefit most from rent control are usually of higher income than the average for the city.
On the other hand, removing rent control can cause a spike in prices, and make things worse in the short run, before there is time for new construction to increase the supply of housing. Also, many economists assume in their models that tenants who get forced out by the higher rents would get compensated for it, which is not at all how the real world works. It’s also unclear exactly how large the effect sizes are, because the empirical studies get quite mixed results. Still, rent control is a bad idea. Don’t take it from me, take it from Paul Krugman.
It’s also common to blame foreign investors—because humans are tribal, and blaming foreigners is always popular—even though that makes no economic sense. Investors are buying your houses because the prices keep rising. It’s possible that there could be some sort of speculative bubble, but that’s actually harder to sustain in housing than it is in most other assets, precisely because houses are immobile and expensive. Speculative bubbles in gold happen all the time (indeed, perhaps literally all the time, as the price of gold has never fallen to its real fundamental value in all of human history), but gold is a tradeable, transportable, fungible commodity that can be bought in arbitrarily small quantities. (Because it’s an element, you’re literally only limited to the atomic level!)
Moreover, it isn’t just supply and demand at work here. Fluctuations in economic growth have strong effects on housing prices—and vice-versa. There are monetary policy effects, particularly in a liquidity trap; lower interest rates combined with low inflation create a perfect storm for higher housing prices.
Overall economic inequality is a major contributor to steep housing prices, as well as the segregation of housing across racial and economic lines. And as the rate of return on productive capital continues to decrease while the rate of return on real estate does not, more and more of our wealth concentration is going to be in the form of higher housing prices—making the whole problem self-reinforcing.
People also seem really ambivalent about whether they want housing prices to be low or high. In one breath they’ll bemoan the lack of affordable housing, and in another they’ll talk about “protecting property values”. Even the IMF called the increase in housing prices after the Second Depression a “recovery”. Is it really so hard to understand that higher prices mean higher prices?
But we think of housing as two fundamentally different things. On the one hand, it’s a durable consumption good, like a car or a refrigerator—something you buy because it’s useful, and keep around to use for a long time. On the other hand, it’s a financial asset—a store of value for your savings and a potential source of income. When you’re thinking of it as a consumption good, you want it to be “affordable”; when you’re thinking of it as an asset, you want to “protect its value”. But it’s the same house with the same price. You can’t do both of those things at once, and clearly, as a society—perhaps as a civilization—we have been tilting way too far in the “asset” direction.
I get it: Financial assets that grow over time have the allure of easy money. The stock market, the derivatives market, even the lottery and Las Vegas, all have this tantalizing property that they seem to give you money for nothing. They are like the quest for the Philosopher’s Stone in days of yore.
But they are just as much a chimera as the Philosopher’s Stone itself. (Also, if anyone had found the Philosopher’s Stone, the glut of gold would have triggered massive inflation, not unlike what happened in Spain in the 16th century.) Any money you get from simply owning an asset or placing a bet is money that had to come from somewhere else. In the case of the stock market, that “somewhere else” is the profits of the corporations you bought, and if you did actually contribute to the investment of those corporations there’s nothing wrong with you getting a proportional share of those profits. But most people aren’t thinking in those terms when they buy stocks, and once you get all the way to sophisticated derivatives you’re basically in full gambling territory. Every option that’s in the money is another option that’s out of the money. Every interest rate swap that turns a profit is another one that bears a loss.
And when it comes to housing, if you magically gain equity from rising property values, where is that money coming from? It’s coming from people desperately struggling to afford to live in your city, people giving up 40%, 50%, even 60% of their disposable income just for the chance to leave in a tiny apartment because they want to be in your city that badly. It’s coming from people who started that way, lost their job, and ended up homeless because they couldn’t sustain the payments anymore. All that easy money is coming from hard-working young people trying to hold themselves out of poverty.
It’s different if your home gains value because you actually did something to make it better—renovations, additions, landscaping. Even then I think these things are sort of overrated; but they do constitute a real economic benefit to the people who live there. But if your home rises in value because zoning regulations and protesting homeowners stop the construction of new high-rises, that’s very much still on the backs of struggling young people.
We need to stop thinking houses as assets that are supposed to earn a return, and instead think of them as consumption goods that provide benefits to people. If you want a return, buy stocks and bonds. When you’re buying a house, you should be buying a house—not some dream of making money for nothing as housing prices rise forever. Because they can’t—sooner or later, the bubble will break—and even if they could, it would be terrible for everyone who didn’t get into the market soon enough.
11 thoughts on “Why is housing so expensive?”
In our neighborhood the foreigners are coming here and buying up the homes. The people that are born here, like my children, can’t afford homes
It can’t just be foreigners. For one thing, Americans are on average richer than people in almost any other country (not quite all; there is always Norway and Luxembourg—but pretty close to all). For another, foreigners buy all sorts of things, and indeed due to their tradeability, foreigners buy our cars and computer software at much higher rates than they buy our housing—and yet, our cars and computer software are affordable and our housing isn’t.
LikeLiked by 1 person
You’re wrong. Asians are the wealthiest race and make have the highest income. Research Chinese investors buying up homes in the US to funnel money out of their communist economy. Canadians have recently been the top investors in US real estate. They are hold9ng onto them houses are left empty as a golden egg investment driv9ng up prices so high locals can no longer afford them. Canada had to impliment a foreign buyer tax just cool things down because it got out of hand. You have no idea what you’re talking about.
Thats a stupid comparison.
Space in a city is limited, compared to production of cars and computers which only have a limit on resources but not on space.
Sitting around letting these corrupt, wealthy, prudish home owner associations destroy our society is disturbing. People have no principles anymore.
Any real man would get in these people’s faces and scare these people into stopping their selfish behavior. You got to send these home owner associations messages and scare them into changing their behavior.
Although I’;m not recommending it, people in the good days when America was first founded tarred and feathered evil people like this, and just laying around waiting for the government to fix these problems when the government is in bed with these Mfer’s is beyond me.
IF they don’t care about the homeless, then so be it. We don’t care about these nefarious plutocrats and their wretched deeds.
[…] several previous posts I’ve talked about the international crisis of high housing prices. Today, I want to talk about some features of housing that make high housing prices particularly […]
Buried in your explanation is the THE primary reason housing is so expensive. Super low interest rates. What I cannot understand is how/why the Fed factors housing prices in or out of their calculus for inflation. I keep hearing how inflation is at bay; then conversely we have a generation of college grads who cannot afford housing and are oh by the way…saddled with massive student loans as a result of super low interest rates. Low rates have made and continues to make it easier for 1950s-70s era homes to be torn down to build 5,000 SF homes that neither serve the older boomers nor the youngest buyers. Couple that with the massive wave of people flocking to major cities to take tech jobs that do not and won’t ever exist in rural areas. I find it absurd that Amazon decided to go to NYC. The third reason for high home prices is zoning and building departments. Their rules were supposed to make building safer, but local municipalities use those as tools to simply to drive home prices up for the sake of sucking the life out of residents (taxes). The more rules, the more expensive housing gets. For me…I live in an older home in a major metropolitan area, but can’t find afford to update it or make accessibility changes.
I actually did mention interest rates as a contributing factor, but I didn’t spend much time on it, because I don’t think it’s the primary explanation.
I think reality shows are also to blame. Everyone wants that fixer upper, and all of sudden, even bad houses now cost a lot.
How about GREED?
Higher wages, cost of materials have risen, along with the cost of property…
Lower these and the cost of housing would go down
I mean, greed is a constant, and also basically what makes capitalism run. So that’s not really an explanation for anything.
Higher wages are generally a good thing, and if they were the sole cause of rising housing costs it would be no problem. (Indeed, housing *affordability* would remain constant.)
Why are materials getting more expensive? It could be natural resource depletion, but that doesn’t seem like an adequate explanation, particularly for things like wood (which is renewable) or stone (which is abundant).
So that leaves “the cost of property”, which is really the monopolistic effect of highly concentrated real estate ownership.