In major cities across the globe – from London to Manila, Auckland to Los Angeles – housing is becoming less and less affordable. This has caused a great deal of angst over house prices. But so far, politicians and the media have been much more effective at whipping up public anxiety, than putting in place actual solutions.
Over-inflated house prices are caused by more than just supply and demand. Policy changes often focus too narrowly on increasing housing supply, by opening up more land for development and speeding up the planning process. Of course, supply is important. If more people want to buy houses than there are houses available then prices may be forced upward.
But it is not enough to address only one cause. Another major driver of price increases is a housing market “bubble”. A bubble can be detected when property prices increase significantly faster than rents. In investment terms, this means you’re buying a more expensive asset, but it doesn’t give a higher return from rental income.
When prices are rising rapidly, buyers tend to anticipate that this will continue, guaranteeing a tidy profit when they eventually sell the property. Add record low interest rates and the resulting abundance of low-cost debt means that house prices can easily become over-inflated, relative to people’s incomes.
The 2013 Nobel Prize-winner Robert Shiller theorised this buyer behaviour and called it “irrational exuberance”. Housing markets in many cities across the globe are stubbornly following Shiller’s theory. As a bubble grows, more people are priced out of the market for buying property, while the apparent urgency to get onto the property ladder increases. Even if housing supply is increasing, the expectation of increasing property values will continue to drive this kind of behaviour in the market.
It is thought that London alone requires 42,000 new homes each year, based on population estimates. Between 2001 and 2011, Greater London’s population increased by 12.6%, while housing supply grew only 7.5%. It is only physically possible to meet this demand by putting more people into existing houses, leading to overcrowding, which is harmful to health and well-being.
So, building more houses won’t discourage irrational investment on its own. In fact, it might encourage more people to take on debt and invest in an over-valued housing market. If the bubble bursts – which would most likely be caused by a recession, or an increase in the cost of debt – prices will undergo a “correction”. Whether this correction is large or small, the financial impact on households and the threat to the stability of the national economy are significant.
How to rent a home
To diffuse this situation, we need to question our common assumptions about housing. The key role of housing is to meet the basic human need for safe and secure shelter. Housing policies mostly assume that home ownership is the only way to do this.
This idea has its roots in the post-war era, when governments promoted the idea of owning your own home, as the mark of financial security. Home ownership is not wrong – although households should seriously consider the risks of taking on large, long-term debts. But arguably, it isn’t an appropriate one-size-fits-all solution for cities in 2016.
So, what other options do we have? For starters, better rental regulations could allow for long-term tenure and provide better protection for tenants. In Germany, only 39% of the population owns their own home, compared with roughly 60% in the UK.
But they also rent under very different conditions to people in the UK. Local governments can limit the rate of rent increases, and tenants have more rights to occupy a property over a long-term period. These arrangements make renting a viable option for people looking for long-term accommodation, which frees up household income to invest in other assets, with lower risk.
The real crisis
There are even more inventive ways to emphasise the importance of access to shelter, over and above home ownership. For one thing, there are some creative and forward-thinking design solutions on show at this year’s “Home Economics” display, at the Venice Biennale.
But we also need to rethink the way we plan our cities. In reality, the housing crisis stems from the fact that house building is left largely to the private market. Private developments don’t always include smaller, more modest homes for low-income households as well as expensive homes for the wealthy (the latter are usually more profitable). A survey of developments between 2014 and 2015 found that only 20% of the total number of homes built were deemed to be “affordable”.
Local governments require a certain share of new houses to cater to those on low incomes, but these affordable housing requirements are notoriously weak, too. In London, as little as 12% of dwellings in new developments need to be “affordable” – a classification which allows rents as high as 80% of market rate. In some cases, the price of a home deemed “affordable” was equal to 30 times the average UK wage.
Policies focused purely on expanding supply, without catering to different income groups, ignore the fact that cities depend on people who earn many different levels of income to provide key services. There are wider costs to society if cleaners, bar staff, creatives, cashiers and nursery assistants cannot afford to live in urban areas. Even if cheaper accommodation is available on the outskirts, this won’t offer a solution if commutes are long and costly.
We don’t know how or when the UK’s housing market bubble will burst, or how much prices might fall when it does. For the moment, those who don’t own property can take comfort in the fact that they aren’t taking on a mortgage in an overvalued property market. Meanwhile, leaders need to consider more innovative housing options, which focus on access rather than ownership. They need to provide meaningful alternatives for people on low incomes – or risk driving them out of our cities altogether.