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Special report | Housing

Housing is at the root of many of the rich world's problems

Since the second world war, governments across the rich world have
made three big mistakes, says Callum Williams

[20200118_S][20200118_S]
Jan 16th 2020
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THE FINANCIAL crisis of 2008-10 illustrated the immense dangers of a
mismanaged housing market. In America during the early to mid-2000s
irresponsible, sometimes illegal, mortgage lending led many
households to accumulate more debt than they could sustain. Between
2000 and 2007 America's household debt rose from 104% of household
income to 144%. House prices rose by 50% in real terms. The ensuing
wave of defaults led to a global recession and nearly brought down
the financial system.

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From the 1960s to the 2000s a quarter of recessions in the rich world
were associated with steep declines in house prices. Recessions
associated with credit crunches and house-price busts were deeper and
lasted longer than other recessions did. Yet the damage caused by
poorly managed housing markets goes much deeper than financial crises
and recessions, as harmful as they are. In rich countries, and
especially in the English-speaking world, housing is too expensive,
damaging the economy and poisoning politics. And it is becoming ever
more so: from their post-crisis low, global real house prices have
since risen by 15%, taking them well past their pre-crisis peak.

Traditionally politicians like it when house prices rise. People feel
richer and therefore borrow and spend more, giving the economy a nice
boost, they think. When everyone is feeling good about their
financial situation, incumbent politicians have a higher chance of
re-election.

But there is another side. Costly housing is unambiguously bad for
the rich world's growing population of renters, forcing them to trim
spending on other goods and services. And an economic policy which
relies on homebuyers taking on large debts is not sustainable. In the
short term, finds a study by the IMF, rising household debt boosts
economic growth and employment. But households then need to rein in
spending to repay their loans, so in three to five years, those
effects are reversed: growth becomes slower than it would have been
otherwise, and the odds of a financial crisis increase.

Malfunctioning housing markets also hit the supply side of the
economy. The rich world's most productive cities do not build enough
new houses, constraining their growth and making them more expensive
than they would otherwise be. People who would like to move to
London, San Francisco or Sydney cannot afford to do so. Since
productivity and wages are much higher in cities than outside, that
reduces overall GDP.

So it is bad news that, in recent decades, the rich world has got
worse at building new homes. A recent paper by Kyle Herkenhoff, Lee
Ohanian and Edward Prescott argues that in America this process has
"slowed interstate migration, reduced factor reallocation, and
depressed output and productivity relative to historical trends".
Constraints on urban growth also make it harder to reduce
carbon-dioxide emissions, since big cities are the most efficient
built forms. In America there are more building restrictions in
places which have lower emissions per household.

Housing is also a big reason why many people across the rich world
feel that the economy does not work for them. Whereas baby-boomers
tend to own big, expensive houses, youngsters must increasingly rent
somewhere cramped with their friends, fomenting millennials'
resentment of their elders. Thomas Piketty, an economist, has claimed
that in recent decades the return to capital has exceeded what is
paid to labour in the form of wages, raising inequality. But others
have critiqued Mr Piketty's findings, pointing out that what truly
explains the rise in the capital share is growing returns on housing.

Other research, meanwhile, has found that housing is behind some of
the biggest political shocks of recent years. Housing markets and
populism are closely linked. Britons living in areas where house
prices are stagnant were more likely to vote for Brexit in 2016, and
French people for the far-right National Front in the presidential
elections of 2017, according to research from Ben Ansell of Oxford
University and David Adler of the European University Institute.
Political disputes sparked the protests in Hong Kong, but the
outrageous cost of accommodation in the city-state has added economic
fuel to the political flames.

This special report will argue that since the second world war,
governments across the rich world have made three big mistakes. They
have made it too difficult to build the accommodation that their
populations require; they have created unwise economic incentives for
households to funnel more money into the housing market; and they
have failed to design a regulatory infrastructure to constrain
housing bubbles.

Happily, they are at last starting to recognise the damage caused by
these policies. In Britain the government now openly says that the
housing market is "broken". Scott Morrison, Australia's prime
minister, has pledged to make housing more affordable. Canada's
recent election was fought partly on who would do more to rein in the
country's spiralling housing costs. Carrie Lam, Hong Kong's chief
executive, has put housing front and centre in her response to the
protesters.

They need to learn from places where the housing market broadly
works--and those places do exist. As this report shows, flexible
planning systems, appropriate taxation and financial regulation can
turn housing into a force for social and economic stability.
Singapore's public-housing system helps improve social inclusion;
mortgage finance in Germany helped the country avoid the worst of the
2008-10 crisis; Switzerland's planning system goes a long way to
explaining why populism has so far not taken off there. Governments
across the world need to act decisively, and without delay. Nothing
less than the world's economic and political stability is at stake. #

This article appeared in the Special report section of the print
edition under the headline "No place like home"

Housing Shaking the foundations

  * Housing is at the root of many of the rich world's problems
  * How housing became the world's biggest asset class
  * Politicians are finally doing something about housing shortages
  * A decade on from the housing crash, new risks are emerging
  * Owner-occupation is not always a better deal than renting
  * Home ownership is in decline
  * Governments are rethinking the provision of public housing
  * What is the future of the rich world's housing markets?

The horrible housing blunder: Why the obsession with home ownership
is so harmfulThe horrible housing blunder: Why the obsession with
home ownership is so harmful

From the January 18th 2020 edition

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