Sep 1 JDN 2460555

We are of two minds about housing in our society. On the one hand, we recognize that shelter is a necessity, and we want it to be affordable for all. On the other hand, we see real estate as an asset, and we want it to appreciate in value and thereby provide a store of wealth. So on the one hand we want it to be cheap, but on the other hand we want it to be expensive. And of course it can’t be both.

This is not a uniquely American phenomenon. As Noah Smith points out, it seems to be how things are done in almost every country in the world. It may be foolish for me to try to turn such a tide. But I’m going to try anyway.

Housing should be cheap.

For some reason, inflation is seen as a bad thing for every other good, necessity and luxury alike; but when it comes to housing in particular—the single biggest expense for almost everyone—suddenly we are conflicted about it, and think that maybe inflation is a good thing actually.

This is because owning a home that appreciates in value provides the illusion of increasing wealth.

Yes, I said illusion. In some particular circumstances it can sometimes increase real wealth, but when housing is getting more expensive everywhere at once (which is basically true), it doesn’t actually increase real wealth—because you still need to have a home. So while you’d get more money if you sold your current home, you’d have to go buy another home that would be just as expensive. That extra wealth is largely imaginary.

In fact, what isn’t an illusion is your increased property tax bill. If you aren’t planning on selling your home any time soon, you should really see its appreciation as a bad thing; now you suddenly owe more in taxes.

Home equity lines of credit complicate this a bit; for some reason we let people collateralize part of the home—even though the whole home is already collateralized with a mortgage to someone else—and thereby turn that largely-imaginary wealth into actual liquid cash. This is just one more way that our financial system is broken; we shouldn’t be offering these lines of credit, just as we shouldn’t be creating mortgage-backed securities. Cleverness is not a virtue in finance; banking should be boring.

But you’re probably still not convinced. So I’d like you to consider a simple thought experiment, where we take either view to the extreme: Make housing 100 times cheaper or 100 times more expensive.

Currently, houses cost about $400,000. So in Cheap World, houses cost $4,000. In Expensive World, they cost $40 million.

In Cheap World, there is no homelessness. Seriously, zero. It would make no sense at all for the government not to simply buy everyone a house. If you want to also buy your own house—or a dozen—go ahead, that’s fine; but you get one for free, paid for by tax dollars, because that’s cheaper than a year of schooling for a high-school student; it’s in fact not much more than what we’d currently spend to house someone in a homeless shelter for a year. So given the choice of offering someone two years at a shelter versus never homeless ever again, it’s pretty obvious we should choose the latter. Thus, in Cheap World, we all have a roof over our heads. And instead of storing their wealth in their homes in Cheap World, people store their wealth in stocks and bonds, which have better returns anyway.

In Expensive World, the top 1% are multi-millionaires who own homes, maybe the top 10% can afford rent, and the remaining 89% of the population are homeless. There’s simply no way to allocate the wealth of our society such that a typical middle class household has $40 million. We’re just not that rich. We probably never will be that rich. It may not even be possible to make a society that rich. In Expensive World, most people live in tents on the streets, because housing has been priced out of reach for all but the richest families.

Cheap World sounds like an amazing place to live. Expensive World is a horrific dystopia. The only thing I changed was the price of housing.

Yes, I changed it a lot; but that was to make the example as clear as possible, and it’s not even as extreme as it probably sounds. At 10% annual growth, 100 times more expensive only takes 49 years. At the current growth rate of housing prices of about 5% per year, it would take 95 years. A century from now, if we don’t fix our housing market, we will live in Expensive World. (Yes, we’ll most likely be richer then too; but will we be that much richer? Median income has not been rising nearly as fast as median housing price. If current trends continue, median income will be 5 times bigger and housing prices will be 100 times bigger—that’s still terrible.)

We’re already seeing something that feels a lot like Expensive World in some of our most expensive cities. San Francisco has ludicrously expensive housing and also a massive homelessness crisis—this is not a coincidence. Homelessness does still exist in more affordable cities, but clearly not at the same crisis level.

I think part of the problem is that people don’t really understand what wealth is. They see the number go up, and they think that means there is more wealth. Real wealth consists in goods, not in prices. The wealth we have is made of real things, not monetary prices. Prices merely decide how wealth is allocated.

A home is wealth, yes. But it’s the same amount of real wealth regardless of what price it has, because what matters is what it’s good for. If you become genuinely richer by selling an appreciated home, you gained that extra wealth from somewhere else; it was not contained within your home. You have appropriated wealth that someone else used to have. You haven’t created wealth; you’ve merely obtained it.

For you as an individual, that may not make a difference; you still get richer. But as a society, it makes all the difference: Moving wealth around doesn’t make our society richer, and all higher prices can do is move wealth around.

This means that rising housing prices simply cannot make our whole society richer. Better houses could do that. More houses could do that. But simply raising the price tag isn’t making our society richer. If it makes anyone richer—which, again, typically it does not—it does so by moving wealth from somewhere else. And since homeowners are generally richer than non-homeowners (even aside from their housing wealth!), more expensive homes means moving wealth from poorer people to richer people—increased inequality.

We used to have affordable housing, just a couple of generations ago. But we may never have truly affordable housing again, because people really don’t like to see that number go down, and they vote for policies accordingly—especially at the local level. Our best hope right now seems to be to keep it from going up faster than the growth rate of income, so that homes don’t become any more unaffordable than they already are.

But frankly I’m not optimistic. I think part of the cyberpunk dystopia we’re careening towards is Expensive World.