Economies can suffer both sudden crashes and chronic diseases. Housing markets in the rich world have caused both types of problem.
A trillion dollars of dud mortgages blew up the financial system in 2007-08. But just as pernicious is the creeping dysfunction that housing has created over decades: vibrant cities without space to grow; aging homeowners in half-empty homes who are keen to protect their view; a generation of young people who cannot easily afford to rent or buy and who think capitalism has let them down.
Much of the blame lies with warped housing policies that date back to World War II and are intertwined with an infatuation with homeownership. They have caused one of the rich world’s most serious and longest-running economic failures. A fresh architecture is urgently needed.
At the root of that failure is a lack of building, especially near thriving cities where jobs are plentiful. From Sydney to Sydenham, fiddly regulations protect an elite of existing homeowners and prevent developers from building the skyscrapers and flats the modern economy demands. Resulting high rents and house prices make it hard for workers to move to where the most productive jobs are, and have slowed growth.
Overall housing costs in America absorb 11% of GDP, up from 8% in the 1970s. If just three big cities — New York, San Francisco and San Jose — relaxed planning rules, America’s GDP could be 4% higher. That is an enormous prize.
As well as being inefficient, housing markets are deeply unfair. Over a period of decades, falling interest rates have compounded inadequate supply and led to a surge in prices. In America the frenzy is concentrated in thriving cities; in other rich countries average national prices have soared.
In Canada they are up by half since 2008.
The soaring cost of housing has created gaping inequalities and has inflamed both generational and geographical divides. In 1990, a generation of baby boomers, with a median age of 35, owned a third of America’s real estate by value. In 2019, a similarly sized cohort of millennials, aged 31, owned just 4%.
Young people’s view that housing is out of reach — unless you have rich parents — helps explain their drift toward “millennial socialism.” And homeowners of all ages who are trapped in declining places resent the windfall housing gains enjoyed in and around successful cities. In Britain, areas with stagnant housing markets were more likely to vote for Brexit in 2016.
You might think fear and envy about housing is part of the human condition. In fact, the property pathology has its roots in a shift in public policy in the 1950s toward promoting homeownership. Since then governments have used subsidies, tax breaks and sales of public housing to encourage owner-occupation over renting. Politicians on the right have seen homeownership as encouraging responsible citizenship. Those on the left see housing as a conduit for redistribution.
These arguments are overstated. It is hard to show whether property ownership makes better citizens. And if you ignore leverage, it is usually better to own stock than to own homes.
And the cult of owner-occupation has huge costs. Those who own homes often become “nimbys” who resist development in an effort to protect their investments. The number of new houses constructed per person in the rich world has fallen by half since the 1960s. Because supply is constrained and the system is skewed toward ownership, most people feel they risk being left behind if they rent. As a result, politicians focus on subsidizing marginal buyers. That channels cash to the middle classes and further boosts prices. And it fuels the buildup of mortgage debt that makes crises more likely.
It does not have to be this way. Not everywhere is afflicted with every part of the housing curse. Tokyo has no property shortage; between 2013 and 2017 it put up 728,000 dwellings — more than England did — without destroying quality of life. Switzerland gives local governments fiscal incentives to allow housing development — one reason why there is almost twice as much homebuilding per person there as in America. New Zealand recoups some of homeowners’ windfall gains through land and property taxes.
Most important, in a few places the rate of homeownership is low and no one bats an eyelid. It is just 50% in Germany, which has a rental sector that encourages long-term tenancies and provides clear and enforceable rights for renters. With ample supply and few tax breaks or subsidies for owner-occupiers, homeownership is far less alluring and the political clout of nimbys is muted. Germany’s real house prices are, on average, no higher than they were in 1980.
Is it possible to escape the homeownership fetish? Few governments today can ignore the anger over housing shortages and intergenerational unfairness. Some have responded with bad ideas like rent controls or even more mortgage subsidies. Yet there has been some progress. America has capped its tax break for mortgage-interest payments. Britain has banned murky upfront fees from rental contracts and curbed risky mortgage lending.
A fledgling “yimby” movement — “yes in my backyard” — has sprung up in many successful cities to promote construction.
Those who want free markets to endure should hope such movements succeed. Far from shoring up capitalism, housing policies have made the system unsafe, inefficient and unfair. Time to tear down this rotten edifice and build a new housing market that works.
Copyright 2013 The Economist Newspaper Limited, London. All Rights Reserved. Reprinted with permission.