tag:theconversation.com,2011:/us/topics/house-prices-1788/articlesHouse prices – The Conversation2024-03-25T18:23:48Ztag:theconversation.com,2011:article/2264172024-03-25T18:23:48Z2024-03-25T18:23:48ZNew house prices are rising rapidly despite a flat market – we need to diversify what we build and who builds it<p>In the <a href="https://www.gov.uk/government/statistics/uk-house-price-index-for-january-2024/uk-house-price-index-england-january-2024">latest figures</a> on UK house prices, new builds are particularly eye-catching. The price for such homes has increased by 17% in the past year, while the average price for existing homes cooled by 2.4%. </p>
<p>While these figures may grab attention for a day or two, there is little awareness of the long-term trend, particularly for new builds produced by the nation’s biggest housebuilders. </p>
<p>For ten years <a href="https://www.shu.ac.uk/centre-regional-economic-social-research/projects/all-projects/large-uk-housebuilders">we have been</a> tracking the performance and finances of the <a href="https://www.housingtoday.co.uk/story.aspx?storyCode=5115234&preview=1&hash=DCD1D60A98A86CC7112B45D1E8463F7C">UK’s largest housebuilders</a>. We know that around the time of the global financial crisis in 2008, the price of new builds from the biggest firms broadly tracked the average UK house price. </p>
<p>Since then, nearly all have increased their prices above the wider market, meaning these homes sell for roughly 8% more than the average house price. </p>
<p>Over the past couple of decades, there have been been fundamental changes in how the major housebuilders operate. In our <a href="https://www.shu.ac.uk/centre-regional-economic-social-research/publications/the-invisible-hand-that-keeps-on-taking">recent report</a>, The Invisible Hand That Keeps On Taking, we showed that in 2005 these firms paid out 16% of pre-tax profits as dividends, amounting to just over £5,000 per home built. In 2022 their dividends were 47% of profits or £22,000 per home. </p>
<p>This has happened as the ownership of these organisations has slowly changed over time, with global asset and investment managers becoming their major shareholders. </p>
<p>Large housebuilders have been able to pay historically unprecedented levels of dividends through a combination of increasing house prices and keeping certain costs down (for instance on land). Evidence suggests some builders have actually been <a href="https://twitter.com/BuiltPlace/status/1428666082936635392">reducing their land costs</a> over time. </p>
<p>A few weeks ago, the UK government’s Competition and Markets Authority (CMA) published a <a href="https://www.gov.uk/cma-cases/housebuilding-market-study">major report</a> into the housebuilding industry. It concluded that the under-delivery of new homes relates to the planning system creating uncertainties and delays, and also the UK’s speculative housebuilding model. On that model, the CMA stated:</p>
<blockquote>
<p>The evidence shows that private developers produce houses at a rate at which they can be sold without needing to reduce their prices, rather than diversifying the types and numbers of homes they build to meet the needs of different communities (for example providing more affordable housing).</p>
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<p>This strongly suggests that to deliver the homes we need, we must diversify the housing types that are built, and this will involve changing who builds. Boosting development by housing associations and other providers of affordable homes, alongside that of self-builders and community-led housing groups, is one of the few routes available to increase the provision of the homes that are actually needed. </p>
<p>For instance, <a href="https://www.gov.uk/guidance/self-build-and-custom-housebuilding">custom and self-build housing</a> accounts for only 7% of new-build homes in the UK, compared to over 50% in Germany. This <a href="https://assets.publishing.service.gov.uk/media/6128c585e90e07053ec5e447/Bacon_Review.pdf">market can be developed</a> by making best use of existing legislation, which requires local authorities to provide enough planning permissions to meet demand for self-build homes. </p>
<p><a href="https://assets.publishing.service.gov.uk/media/65d8baed6efa83001ddcc5cd/Housebuilding_market_study_final_report.pdf">The CMA notes</a> that such forms of non-speculative housebuilding may result in “a lower return on investment which could feed through to lower build prices”. If we are to address the affordability of new housing, we will likely need these forms of development.</p>
<h2>Housebuilders’ profits</h2>
<p>The CMA is certainly alighting on an important issue here. However, we would also argue that it has failed to grasp the changes in how the major housebuilders operate, which directly affects what they build and how much it costs. </p>
<p>The CMA’s report found that the builders’ profits were above ‘normal’ for most of the 2010s, but crucially concluded this is just a feature of the cyclical nature of housebuilding. </p>
<p>And yet its own analysis suggests that for 12 of the last 20 years, returns were greater than a “normal” rate of profit. As cycles go, that’s very favourable, and we think it reflects a step change in value extraction from the firms in question. </p>
<p><a href="https://www.shu.ac.uk/centre-regional-economic-social-research/publications/the-invisible-hand-that-keeps-on-taking">We estimate</a> that over £16 billion was returned to shareholders in the eight largest firms between 2005 and 2022. This represents a major missed opportunity to reinvest in building more homes, and to address other issues that the <a href="https://assets.publishing.service.gov.uk/media/65d8baed6efa83001ddcc5cd/Housebuilding_market_study_final_report.pdf">CMA highlights</a>, including a lack of innovation, issues with the quality of many new homes and the slow adoption of measures to reduce carbon emissions.</p>
<p>Given the significant changes in the price of new-build housing, we should try to understand the real dynamics behind it. If the UK wants to deliver more homes that are affordable to people on modest incomes, then it needs to diversify what is built and, crucially, who builds it.</p><img src="https://counter.theconversation.com/content/226417/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>In the middle of a cost of living crisis, new-build prices are up by nearly a fifth in the past year alone.Tom Archer, Senior Research Fellow, the Centre for Regional Economic and Social Research, Sheffield Hallam UniversityIan Cole, Emeritus Professor of Housing Studies, Sheffield Hallam UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2199662023-12-21T21:54:53Z2023-12-21T21:54:53ZIt’s not just housing: the ‘bank of mum and dad’ is increasingly helping fund the lives of young Australians<figure><img src="https://images.theconversation.com/files/566790/original/file-20231220-15-irhy2g.jpg?ixlib=rb-1.1.0&rect=35%2C8%2C5955%2C3979&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/child-congratulations-graduates-business-man-house-713443921">Shutterstock</a></span></figcaption></figure><p>Much has been made of the increasing presence of the “bank of mum and dad” in the lives of Australians. </p>
<p>We know financial support from parents to adult children is increasingly used for entering the <a href="https://www.ahuri.edu.au/research/final-reports/395">housing market</a>. </p>
<p>But our new <a href="https://doi.org/10.1177/14407833231210956">research</a> shows parents are also helping their young adult children in other ways, including with meeting everyday expenses. We’ve gained new insights into who is receiving support from parents and what it’s used for.</p>
<p>So what does this look like in practice, and what does it mean for intergenerational inequality in Australia?</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/how-housing-made-rich-australians-50-richer-leaving-renters-and-the-young-behind-and-how-to-fix-it-195189">How housing made rich Australians 50% richer, leaving renters and the young behind – and how to fix it</a>
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</em>
</p>
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<h2>Parental financial support becoming commonplace</h2>
<p>We have surveyed a diverse group of young Australians for almost <a href="https://education.unimelb.edu.au/life-patterns">18 years</a>, since they were in year 12 in 2006. This has allowed us to follow the trajectory of a cohort of millennials as they have transitioned to adulthood. </p>
<p>One of the areas we ask about is their sources of financial support. This includes their own income, savings and investments, and government support, but also gifts, loans and other transfers from their family. </p>
<p>Our findings show that financial support from family – typically parents – has become important for this generation well into young adulthood. </p>
<p>This support from family was very common for our participants when they were in their late teens. Perhaps more surprisingly, for many this support continued into their 20s and, for a significant minority, into their late 20s and beyond. </p>
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<p>So is it only rich parents providing this assistance? Turns out, not really. Our results show young adults from diverse socioeconomic backgrounds get financial help. </p>
<p>Surprisingly, the educational level and occupation status of their parents did not predict whether our participants were receiving support. Parents with higher education and in managerial or professional careers are providing financial help. But so too are parents of more modest means, even if the amount of support they can provide clearly differs.</p>
<h2>It’s not just about houses</h2>
<p>Our participants are using this support to pay basic expenses. </p>
<p>One in five 32-year-olds in our study report struggling to pay for three or more basic expenses (we ask about food, rent or mortgage repayments, house bills and healthcare costs). These young adults are three times more likely than those not facing this struggle to report receiving financial support from their family. </p>
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<p>These gifts and loans are also used to support parenting, and to support those working part-time out of choice or necessity.</p>
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<p>Some of our participants working part-time in their late 20s and early 30s are not in such a precarious position. They are receiving parental support while they pursue graduate study in medicine or law, for example. </p>
<p>So while some are using support to meet day-to-day needs, we also see parents helping their children “get ahead”. </p>
<p>Financial support is also used to pursue extended education and manage a period of insecure and poorly paid employment on the way to more secure and well-paid careers in medicine, academia or journalism.</p>
<p>This intergenerational support has social ramifications that go beyond buying property. Our research suggests it also shapes education pathways, employment, parenting, and potentially general wellbeing. </p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/how-well-off-you-are-depends-on-who-you-are-comparing-the-lives-of-australias-millennials-gen-xers-and-baby-boomers-172064">How well off you are depends on who you are. Comparing the lives of Australia's Millennials, Gen-Xers and Baby Boomers</a>
</strong>
</em>
</p>
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<h2>An outsized role for the bank of mum and dad</h2>
<p>Our results are an example of just how much life has changed in Australia. The growing challenges of cost of living and the effects of a booming housing market over many decades are changing the dynamics of inequality.</p>
<p>Most of the parents’ generation of the young people we have tracked are part of the Baby Boomer cohort. While there is substantial economic inequality within it, overall, this group benefited from the housing and other <a href="https://doi.org/10.1080/1600910X.2022.2058718">asset</a> booms over recent decades. </p>
<p>Many parents are using this foundation to help their children well beyond their teenage years. Of course, wealthy parents might find it easier to provide this support but are not the only parents providing it. For less wealthy parents, this might potentially change their plans for their own future and retirement. </p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/friday-essay-how-policies-favouring-rich-older-people-make-young-australians-generation-f-d-199403">Friday essay: how policies favouring rich, older people make young Australians Generation F-d</a>
</strong>
</em>
</p>
<hr>
<p>Previous research has highlighted that the bank of mum and dad is becoming crucial for <a href="https://doi.org/10.1080/02673037.2020.1754347">buying</a> a house and that this might exacerbate and entrench <a href="https://doi.org/10.1080/1600910X.2020.1752275">inequality</a> for future generations.</p>
<p>Our work suggests it goes beyond housing. Parents are helping combat financial insecurity for their young adult children across the board. Our data shows this widespread insecurity emerged before the current cost-of-living crisis, but current conditions are going to exacerbate it. </p>
<p>So we need to ask whether we want the bank of mum and dad to continue to play an ever-growing role in life chances in Australia. Based on our research, that change is already underway.</p><img src="https://counter.theconversation.com/content/219966/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Dan Woodman receives funding from the Australian Research Council. </span></em></p><p class="fine-print"><em><span>Julia Cook receives funding from the Australian Research Council. </span></em></p><p class="fine-print"><em><span>Quentin Maire does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointments.</span></em></p>It’s now common knowledge loans and gifts from family are a large part of breaking into the housing market. But how is parental financial support being used in other areas?Dan Woodman, TR Ashworth Professor in Sociology, The University of MelbourneJulia Cook, Senior Lecturer in Sociology, University of NewcastleQuentin Maire, Senior Research Fellow, The University of MelbourneLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2079382023-06-23T13:39:43Z2023-06-23T13:39:43ZHouse prices are falling, but that doesn’t mean you should buy now – here’s what first-time buyers should consider<figure><img src="https://images.theconversation.com/files/533158/original/file-20230621-17-zukczo.jpg?ixlib=rb-1.1.0&rect=616%2C174%2C5518%2C3228&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/two-young-lesbian-women-family-couple-2297606011">Andrii Iemelianenko/Shutterstock</a></span></figcaption></figure><p>House prices in the UK fell by 3.4% in the last year, the biggest annual fall in <a href="https://www.nationwidehousepriceindex.co.uk/reports/annual-house-price-growth-slips-back-in-may">nearly 14 years</a>. The inflation-adjusted average house price is now what it was in 2014.</p>
<p>While this may seem like good news, it doesn’t necessarily mean it’s the right time to get on the property ladder. Today, many in their 20s and 30s face difficulties buying their first house mainly due to increasing borrowing costs. </p>
<p>Average mortgage lending rates (based on a two-year fixed rate with a 10% deposit) are now close to 6% compared to <a href="https://www.bankofengland.co.uk/statistics/visual-summaries/quoted-household-interest-rates">2% in January 2022</a>. For a £200,000 mortgage, <a href="https://www.statista.com/statistics/915977/average-value-of-mortgage-granted-in-the-united-kingdom/">the average for UK households</a>, this 4% difference increases monthly payments by almost <a href="https://theconversation.com/five-ways-to-reduce-your-mortgage-repayments-in-2023-and-why-rates-have-risen-so-high-196327">£480 a month</a>.</p>
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<img alt="Quarter life, a series by The Conversation" src="https://images.theconversation.com/files/451343/original/file-20220310-13-1bj6csd.png?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/451343/original/file-20220310-13-1bj6csd.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=600&fit=crop&dpr=1 600w, https://images.theconversation.com/files/451343/original/file-20220310-13-1bj6csd.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=600&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/451343/original/file-20220310-13-1bj6csd.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=600&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/451343/original/file-20220310-13-1bj6csd.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=754&fit=crop&dpr=1 754w, https://images.theconversation.com/files/451343/original/file-20220310-13-1bj6csd.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=754&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/451343/original/file-20220310-13-1bj6csd.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=754&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<p><em><strong><a href="https://theconversation.com/uk/topics/quarter-life-117947?utm_source=TCUK&utm_medium=linkback&utm_campaign=UK+YP2022&utm_content=InArticleTop">This article is part of Quarter Life</a></strong>, a series about issues affecting those of us in our twenties and thirties. From the challenges of beginning a career and taking care of our mental health to the excitement of starting a family, adopting a pet or just making friends as an adult. The articles in this series explore the questions and bring answers as we navigate this turbulent period of life.</em></p>
<p><em>You may be interested in:</em></p>
<p><em><a href="https://theconversation.com/why-youre-less-likely-to-get-rich-these-days-if-your-parents-arent-already-wealthy-194321?utm_source=TCUK&utm_medium=linkback&utm_campaign=UK+YP2022&utm_content=InArticleTop">Why you’re less likely to get rich these days if your parents aren’t already wealthy</a></em></p>
<p><em><a href="https://theconversation.com/managing-people-for-the-first-time-expert-tips-on-how-to-succeed-198615?utm_source=TCUK&utm_medium=linkback&utm_campaign=UK+YP2022&utm_content=InArticleTop">Managing people for the first time: expert tips on how to succeed</a></em></p>
<p><em><a href="https://theconversation.com/owning-houseplants-can-boost-your-mental-health-heres-how-to-pick-the-right-one-202197?utm_source=TCUK&utm_medium=linkback&utm_campaign=UK+YP2022&utm_content=InArticleTop">Owning houseplants can boost your mental health – here’s how to pick the right one</a></em></p>
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<p><a href="https://www.bbc.co.uk/news/business-12196322">Soaring inflation</a> is not helping either. It is becoming more difficult to afford basic living expenses (including <a href="https://www.ons.gov.uk/economy/inflationandpriceindices/bulletins/indexofprivatehousingrentalprices/march2023">rental costs</a>), and also to save for a deposit required for a mortgage.</p>
<p>The benefit of decreasing house prices may be offset by interest rate hikes and inflation. What’s more, the prices for typical first-time-buyer properties, such as flats, have not eased as much as the other sectors of the market. Since the start of the pandemic, the price increase, and the recently observed drops, have been less for flats and maisonettes than for other properties.</p>
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<img alt="Chart showing that prices for flats and maisonettes have not increased or dropped at the same levels as other properties." src="https://images.theconversation.com/files/533128/original/file-20230621-18-2m3krj.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/533128/original/file-20230621-18-2m3krj.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=316&fit=crop&dpr=1 600w, https://images.theconversation.com/files/533128/original/file-20230621-18-2m3krj.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=316&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/533128/original/file-20230621-18-2m3krj.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=316&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/533128/original/file-20230621-18-2m3krj.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=397&fit=crop&dpr=1 754w, https://images.theconversation.com/files/533128/original/file-20230621-18-2m3krj.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=397&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/533128/original/file-20230621-18-2m3krj.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=397&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="attribution"><span class="source">Alper Kara/Land Registry Data</span>, <span class="license">Author provided</span></span>
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<h2>What to ask a mortgage adviser</h2>
<p>The idea of buying a first home is exciting. However, it is best to act with caution and consider the various factors carefully. One important factor is, of course, what mortgages are available. </p>
<p>Mortgage comparison <a href="https://www.moneysavingexpert.com/mortgages/best-buys/">websites</a> are a good starting point. Once you familiarise yourself with those, the best approach is to use a qualified, independent mortgage adviser. They often have access to mortgages exclusive to them, often with better rates, than those available publicly or from a bank.</p>
<p>After checking that they are a regulated and independent adviser, and asking about their fees, here are three important questions to ask and discuss with the broker. Don’t be shy, and make sure you are comfortable with all the details before deciding.</p>
<h2>1. How much can I borrow?</h2>
<p>Find out how much you can borrow <a href="https://www.moneysavingexpert.com/mortgages/how-much-mortgage-borrowing/">using a mortgage calculator</a>. Often, couples who are both in work are at an advantage and can borrow more. </p>
<p>Be on the conservative side when considering how much you can pay for a mortgage after living expenses. Don’t stretch your income to the limit, as interest rates could increase in the future. It is best to talk to a mortgage adviser if you are worried about this.</p>
<p>If you are renting, compare your current rent payment to what you would potentially be paying for a mortgage. If they are similar, then it may be worth buying as a mortgage helps you to own your home over time.</p>
<h2>2. What are my deposit options?</h2>
<p>Check the size of the deposit needed for the property you want to buy. With the government’s <a href="https://www.gov.uk/government/news/government-extends-mortgage-guarantee-scheme">mortgage guarantee scheme</a>, this could be as low as 5%. To support first-time buyers, there are also <a href="https://www.skipton.co.uk/press-office/press-release-article?BlogID=%7B13A47958-66DB-4D1A-B686-F7BFCF3FD742%7D">0% deposit mortgages</a>. However, be aware that a no-deposit mortgage comes with risks. If house prices fall further, you may be left in negative equity instantly – meaning that your house is now worth less than your outstanding mortgage. </p>
<p>Other mortgage products may be available if you have support from <a href="https://www.nationwide.co.uk/mortgages/family-deposit-mortgage/">family</a> or <a href="https://www.generationhome.com/">friends</a> for a deposit. Bear in mind that deposit size matters as banks charge lower rates if you have a higher deposit – this is known as the <a href="https://www.halifax.co.uk/mortgages/help-and-advice/what-is-loan-to-value.html">loan-to-value ratio</a>.</p>
<h2>3. What other costs might I face?</h2>
<p>Buying and selling properties involves high extra costs, <a href="https://www.thetimes.co.uk/money-mentor/answer/hidden-costs-house-buying/">such as legal, survey, mortgage or estate agent fees</a>. The good news is that first-time buyers are <a href="https://www.gov.uk/government/publications/stamp-duty-land-tax-relief-for-first-time-buyers/stamp-duty-land-tax-relief-for-first-time-buyers">exempt from stamp duty</a>, a substantial cost, for properties up to £300,000. </p>
<p>Make sure you have savings beyond your deposit. If you anticipate needing to move again soon, for example, to move in with a partner or be closer to family, then it may not be the best option to buy a home before you settle.</p>
<p>Also, be aware that <a href="https://www.gov.uk/leasehold-property/service-charges-and-other-expenses">leasehold properties</a> (typically flats or apartments) often have monthly service charges, usually <a href="https://www.redbrickpm.co.uk/blog/how-are-the-average-service-charges-for-flats-calculated/#:%7E:text=What%20is%20the%20average%20service,London%20and%20new%2Dbuild%20flats.">between £1,000 to £2,000 a year</a>. </p>
<figure class="align-center ">
<img alt="A young man and woman sitting on a couch, looking stressed. He is looking at a document, she has her head in her hands." src="https://images.theconversation.com/files/533156/original/file-20230621-27-7iw1na.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/533156/original/file-20230621-27-7iw1na.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/533156/original/file-20230621-27-7iw1na.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/533156/original/file-20230621-27-7iw1na.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/533156/original/file-20230621-27-7iw1na.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/533156/original/file-20230621-27-7iw1na.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/533156/original/file-20230621-27-7iw1na.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">There are more financial factors to consider than house price.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/frustrated-young-couple-checking-financial-documents-1902150268">fizkes/Shutterstock</a></span>
</figcaption>
</figure>
<h2>Understanding mortgage products</h2>
<p>Understanding mortgage products and comparing them is a daunting task. It is best to discuss these in detail with a mortgage adviser to make the right choice. A key feature of mortgages is interest charged. You’ll need to have a plan for how to pay this, especially as interest rates go up. </p>
<p>A fixed-rate mortgage gives you certainty for a period of time (typically two to five years). With a fixed rate your monthly payments will not change, regardless of the <a href="https://www.bankofengland.co.uk/monetary-policy/the-interest-rate-bank-rate">Bank of England base rate changes</a>. There are now also <a href="https://www.moneysupermarket.com/mortgages/ten-year-fixed-rate/">ten-year fixed rates</a> offered in the market, but such deals would not allow you to benefit from any long-term drop in the interest rates.</p>
<p>A variable-rate mortgage is adjusted automatically to Bank of England rate changes. So your monthly payments may increase or decrease unexpectedly. The <a href="https://www.bbc.co.uk/news/business-65966723">higher than expected inflation figures</a> could be a signal that interest rates may increase further in the coming months. </p>
<p>Check if a deal allows you to <a href="https://www.moneysavingexpert.com/mortgages/mortgage-overpayment-calculator/#:%7E:text=Note.,more%20than%20once%20a%20year.">overpay</a> your mortgage, typically around 10% of the borrowed amount. In a high-interest-rate environment like now, having the option to make additional payments whenever you can, will reduce your overall borrowing costs.</p>
<p>Buying your first home is likely the most important financial decision of your life so far. Don’t rush into things. Speak to experts, and consider inflation and other costs. </p>
<hr>
<p><em>This article is not intended to be in-depth financial advice. If you have questions about your situation, talk to a qualified, independent mortgage adviser.</em></p><img src="https://counter.theconversation.com/content/207938/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Alper Kara does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The questions you should be asking a mortgage broker.Alper Kara, Professor and Head of Department - Accounting, Finance and Economics, University of HuddersfieldLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1897292022-11-10T17:40:48Z2022-11-10T17:40:48ZEngland’s housing strategy carries a high carbon cost – unless politicians are willing to change plans<figure><img src="https://images.theconversation.com/files/488773/original/file-20221007-26-vj4ru0.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">The government's response to the housing crisis has been to build more homes.</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/construction-worker-wearing-safety-harness-line-1911747679">M2020/Shutterstock</a></span></figcaption></figure><p>England’s housing sector accounts for <a href="https://www.theccc.org.uk/publication/uk-housing-fit-for-the-future/">20% of the country’s emissions</a>. Its stock is outdated and <a href="https://www.theccc.org.uk/wp-content/uploads/2020/12/Policies-for-the-Sixth-Carbon-Budget-and-Net-Zero.pdf">efforts</a> to improve the energy efficiency of England’s homes are limited.</p>
<p>The country also has a housing crisis. Successive governments have responded to this by building more homes. The current government wants <a href="https://researchbriefings.files.parliament.uk/documents/CBP-7671/CBP-7671.pdf">300,000 extra homes</a> built each year, coupled with adding <a href="https://www.gov.uk/government/statistics/final-uk-greenhouse-gas-emissions-national-statistics-1990-to-2019">energy-efficiency measures</a> to existing homes.</p>
<p>But our <a href="https://www.sciencedirect.com/science/article/pii/S0921800922002245">research</a> demonstrates that, based on current trends, England’s housing strategy could consume our entire <a href="https://cusp.ac.uk/wp-content/uploads/WP-29-Zero-Carbon-Sooner-update.pdf">carbon budget</a> by 2050. This is England‘s share of the global emissions required to limit global heating to 1.5°C by 2050, as agreed as part of the Paris Agreement. The majority would be consumed by the emissions of existing stock, with the remainder mainly arising from the construction of new homes.</p>
<p>Meeting society’s housing needs without causing lasting damage to the environment is a challenge. Retrofitting existing homes, providing social housing, reducing second-home ownership and disincentivising the purchase of homes as a financial investment are all possible solutions.</p>
<h2>Addressing housing emissions</h2>
<p>Around 54% of England’s homes are so energy inefficient that the Climate Change Committee – the UK’s independent advisor on climate change – <a href="https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1060141/2020-21_EHS_Headline_Report_revised.pdf">recommends</a> they must be retrofitted by 2028 to achieve national climate targets. Addressing the emissions of the existing stock is an important step. </p>
<p>This would involve radical <a href="https://greathomesupgrade.org/">energy efficiency measures</a> and the decarbonisation of heating and electricity systems, such as widespread adoption of low-carbon alternatives such as ground source heat pumps and the installation of solar panels. We estimate that if the existing homes become zero carbon by 2050, the housing system would consume 38% less of the carbon budget than currently forecast.</p>
<figure class="align-center ">
<img alt="A cross section graphic of an energy efficient house." src="https://images.theconversation.com/files/493457/original/file-20221104-15-gdma2m.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/493457/original/file-20221104-15-gdma2m.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=675&fit=crop&dpr=1 600w, https://images.theconversation.com/files/493457/original/file-20221104-15-gdma2m.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=675&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/493457/original/file-20221104-15-gdma2m.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=675&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/493457/original/file-20221104-15-gdma2m.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=848&fit=crop&dpr=1 754w, https://images.theconversation.com/files/493457/original/file-20221104-15-gdma2m.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=848&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/493457/original/file-20221104-15-gdma2m.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=848&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">An energy efficient eco-house.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-vector/contemporary-energy-efficient-isometric-eco-house-1085571590">elenabsl/Shutterstock</a></span>
</figcaption>
</figure>
<p>Tackling the emissions from new homes is more complex. The conventional narrative surrounding the housing crisis is that it is caused by a shortage of housing. This creates a trade-off between the climate and the social priority of building homes. </p>
<p>Consecutive governments have reacted by accelerated housing construction. This resulted in there being <a href="https://housingevidence.ac.uk/wp-content/uploads/2019/08/20190820b-CaCHE-Housing-Supply-FINAL.pdf">1.2 million</a> more houses in England than there were households in 2019. Despite this, homes cost <a href="https://landregistry.data.gov.uk/app/ukhpi/browse?from=2000-01-01&location=http%3A%2F%2Flandregistry.data.gov.uk%2Fid%2Fregion%2Fengland&to=2022-08-01&lang=en">314% more</a> on average in August 2022 than in January 2000.</p>
<h2>Why is housing so expensive?</h2>
<p>The financial dynamics of the English housing market and inequality of access to it offer an alternative explanation for the crisis. </p>
<p>Financial deregulation and liberalisation in the 1980s made it much easier for a wider range of people to get mortgages. Mortgage lending quadrupled from roughly 15% of the UK’s GDP in the 1960s to around <a href="https://academic.oup.com/ser/advance-article/doi/10.1093/ser/mwab041/6413687?login=false">60% by 2008</a>. With more credit flowing towards an inelastic supply of new housing, the unsurprising result was inflated house prices. </p>
<p>But unlike most commodities, where rising prices lead to falling demand, high house prices instead create further demand for mortgage credit as housing is also valued as an investment. This creates a <a href="https://eur01.safelinks.protection.outlook.com/?url=https%3A%2F%2Fjournals.sagepub.com%2Fdoi%2Fabs%2F10.1177%2F0308518X19862811%3FjournalCode%3Depna&data=05%7C01%7Cj.ryan-collins%40ucl.ac.uk%7C42314b4e24c740584bcb08da90e78863%7C1faf88fea9984c5b93c9210a11d9a5c2%7C0%7C0%7C637981621777972793%7CUnknown%7CTWFpbGZsb3d8eyJWIjoiMC4wLjAwMDAiLCJQIjoiV2luMzIiLCJBTiI6Ik1haWwiLCJXVCI6Mn0%3D%7C3000%7C%7C%7C&sdata=xL8FDLd5zlIPNkJb90Sc5CGVqpQuDXSHvX5hGSlFEkk%3D&reserved=0">positive feedback loop</a> whereby subsequent price rises encourage people to enter the housing market to benefit from higher prices.</p>
<p>Domestic and foreign investors also entered the market, competing with ordinary homeowners to maintain high prices. From 2014 to 2016, <a href="https://eprints.whiterose.ac.uk/117771/8/GLA_version_University_of_York_data_report_amend_060617aw_no_track_changes.pdf">13% of all homes purchased</a> in London were bought by overseas investors. </p>
<p>High house prices also exacerbate inequalities in access to housing. Buyers who already own property can secure additional mortgage loans at favourable rates, beating first-time buyers to available stock. </p>
<p>But many houses are unoccupied, or rarely used. Around <a href="https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/898190/2020_EHS_second_homes_factsheet.pdf">500,000 second homes</a> in England have owners that do not choose to rent them out, while the amount of homes owned by people registered abroad has trebled to <a href="https://www.thetimes.co.uk/article/stop-property-being-used-for-economic-crime-demand-mps-ngdjzs9zf">250,000</a> since 2010. </p>
<figure class="align-center ">
<img alt="A row of white houses on top of a cliff overlooking the sea against a clear blue sky." src="https://images.theconversation.com/files/492813/original/file-20221101-16-zf8z24.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/492813/original/file-20221101-16-zf8z24.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=402&fit=crop&dpr=1 600w, https://images.theconversation.com/files/492813/original/file-20221101-16-zf8z24.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=402&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/492813/original/file-20221101-16-zf8z24.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=402&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/492813/original/file-20221101-16-zf8z24.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=505&fit=crop&dpr=1 754w, https://images.theconversation.com/files/492813/original/file-20221101-16-zf8z24.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=505&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/492813/original/file-20221101-16-zf8z24.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=505&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">500,000 second homes are unavailable for rent in England.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/coverack-cornwall-england-uk-5934898">David Hughes/Shutterstock</a></span>
</figcaption>
</figure>
<h2>Solutions to the housing crisis</h2>
<p>Without addressing these issues, many new homes will remain unaffordable and continue to satisfy primarily the demands of wealthy homeowners, while locking in further carbon emissions. Only strategies that create fairer access to buying homes will ensure everyone’s housing needs are satisfied. </p>
<p>There are several ways to achieve this at a minimal environmental cost. </p>
<p>Existing housing space can be used more efficiently. By taxing second and foreign-owned homes, the over-consumption of housing could be discouraged. The impact on demand would reduce prices and release stock onto the market.</p>
<p>Taxation has been used to curb soaring house prices in Canada. In 2016, British Columbia’s government imposed a 15% tax on foreign entities buying residential property in <a href="http://www.brightblue.org.uk/wp-content/uploads/2021/05/BB_Property-Taxes-Report-May-2021_prf06b.pdf">Vancouver</a>. <a href="https://www.sciencedirect.com/science/article/abs/pii/S1051137721000620">Research</a> indicates that this tax reduced house prices in Vancouver by 5% from 2016 to 2017. </p>
<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/492816/original/file-20221101-26796-96njxb.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="Vancouver skyline at sunset with the silhouette of the mountains in the background." src="https://images.theconversation.com/files/492816/original/file-20221101-26796-96njxb.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/492816/original/file-20221101-26796-96njxb.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/492816/original/file-20221101-26796-96njxb.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/492816/original/file-20221101-26796-96njxb.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/492816/original/file-20221101-26796-96njxb.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/492816/original/file-20221101-26796-96njxb.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/492816/original/file-20221101-26796-96njxb.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Taxation on foreign property buyers has been introduced in Vancouver.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/vancouver-city-skyline-night-british-columbia-573307366">TRphotos/Shutterstock</a></span>
</figcaption>
</figure>
<p>Accelerating the construction of <a href="https://www.housing.org.uk/globalassets/files/people-in-housing-need/people-in-housing-need-2021_summary.pdf">new social housing</a> to cater specifically for those who could not otherwise afford housing is another method. New construction should also conform to strict emissions standards to avoid adding future decarbonisation costs.</p>
<h2>Economy based on house prices</h2>
<p>But England’s economy is <a href="https://journals.sagepub.com/doi/abs/10.1177/0308518X19862811">structurally dependent</a> on house price rises. Measures to restrict financial speculation and release existing housing space to meet ordinary people’s needs receive little attention in government policy.</p>
<p><a href="https://books.google.co.uk/books?hl=en&lr=&id=9md-DwAAQBAJ&oi=fnd&pg=PT6&dq=Why+cant+you+Afford+a+Home&ots=V6iswYEb37&sig=Auzcmc5TXq7YyTDWuCxI2e-N_ck&redir_esc=y#v=onepage&q=Why%20cant%20you%20Afford%20a%20Home&f=false">Almost half</a> of all bank assets in the UK are tied up in property. Falling house prices would have serious implications on the financial sector’s willingness to provide credit.</p>
<p>Many homeowners have also <a href="https://discovery.ucl.ac.uk/id/eprint/10025890/1/Gallent_TPR%20Submission%20-%2023%20October%202017%20-%20Accepted.pdf">gambled on rising housing prices</a> to justify large mortgage debts or to ensure decent assets for themselves for when they retire. </p>
<p>Homeowners also represent <a href="https://www.ethnicity-facts-figures.service.gov.uk/housing/owning-and-renting/home-ownership/latest#main-facts-and-figures">63%</a> of the population, according to figures from 2018, and are a powerful political voice. The UK property lobby, for example, donated over <a href="https://www.transparency.org.uk/sites/default/files/pdf/publications/House%20of%20Cards%20-%20Transparency%20International%20UK%20%28web%29.pdf">£60 million</a> to the Conservative party from 2010 to 2020. There is a clear political incentive to maintain high house prices, with political parties in direct <a href="https://academic.oup.com/ser/article-abstract/18/4/913/5051712?login=false">competition</a> for the support of homeowners.</p>
<p>There are political and economic barriers to moving towards fairer housing policies. But these challenges are not insurmountable. One way would be to reform the pensions system to reduce individuals’ dependence on house prices for their financial security.</p>
<p>In combination with measures to <a href="https://neweconomics.org/2020/07/a-national-house-retrofitting-programme">retrofit the existing stock</a> it would be possible to move towards a future where society’s housing needs are met without exceeding environmental limits.</p><img src="https://counter.theconversation.com/content/189729/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>England’s housing strategy will consume our entire carbon budget by 2050 – there are alternatives, but they face political and economic barriers.Sophus zu Ermgassen, PhD Researcher, Durrell Institute for Conservation and Ecology, University of KentChristine Corlet Walker, Doctoral researcher, Centre for the Understanding of Sustainable Prosperity, University of SurreyJosh Ryan-Collins, Head of Finance and Macroeconomics, Institute of Innovation and Public Purpose, UCLLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1860722022-08-03T13:15:02Z2022-08-03T13:15:02ZUK house prices: history says the market is in for a long slowdown not a crash<p>It’s going to be easier to get on the property ladder following a <a href="https://www.theguardian.com/money/2022/aug/01/bank-of-england-scraps-mortgage-affordability-test">recent decision</a> by the Bank of England to relax some of the criteria for getting a mortgage. Combined with <a href="https://www.itv.com/news/2022-06-01/boe-housing-market-starting-to-turn-but-interest-rates-not-returning-to-90s">expectations of a slowdown</a> in the property market, this news will be something of a relief to those who have been unable to buy a home due to booming prices in recent years.</p>
<p>People’s ability to buy property is at a record low in England, with the average house costing <a href="https://www.ons.gov.uk/peoplepopulationandcommunity/housing/bulletins/housingaffordabilityinenglandandwales/2021#measuring-the-data">nearly nine times</a> average annual disposable household income. Scottish buyers pay more than five times, on average, while Welsh house prices are currently six times disposable income.</p>
<p>Affordability has been affected by a recent <a href="https://www.halifax.co.uk/assets/pdf/june-2022-halifax-price-index.pdf">boom</a> in house prices as demand for new properties rose after pandemic lockdown restrictions were lifted. The number of houses changing hands during this time has kept prices elevated, with transactions currently at the <a href="https://www.gov.uk/government/statistics/monthly-property-transactions-completed-in-the-uk-with-value-40000-or-above">highest level</a> since just before the global financial crisis in 2008. </p>
<p>But while the latest Nationwide figures for UK house price growth are still in <a href="https://www.nationwidehousepriceindex.co.uk/reports/annual-house-price-growth-stays-in-double-digits-as-july-sees-twelfth-successive-monthly-increase">double digits</a>, the rise has slowed in recent months. A crash, which is generally understood as a price drop of 20% or more, is unlikely. But a correction (a fall of between 10% and 20%) could happen if the economy takes a substantial dip. This prospect looks increasingly likely as inflation looks set to <a href="https://www.theguardian.com/business/2022/aug/03/inflation-will-soar-to-astronomical-levels-over-next-year-thinktank-warns">pass 10%</a> in coming months, which would cause consumers and businesses to rein in spending.</p>
<h2>House price growth</h2>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/477016/original/file-20220801-67954-1hzec1.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="Bar chart showing house price changes" src="https://images.theconversation.com/files/477016/original/file-20220801-67954-1hzec1.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/477016/original/file-20220801-67954-1hzec1.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=310&fit=crop&dpr=1 600w, https://images.theconversation.com/files/477016/original/file-20220801-67954-1hzec1.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=310&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/477016/original/file-20220801-67954-1hzec1.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=310&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/477016/original/file-20220801-67954-1hzec1.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=390&fit=crop&dpr=1 754w, https://images.theconversation.com/files/477016/original/file-20220801-67954-1hzec1.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=390&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/477016/original/file-20220801-67954-1hzec1.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=390&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Annual percentage change in UK house prices, June 2019 to June 2022.</span>
<span class="attribution"><a class="source" href="https://www.nationwidehousepriceindex.co.uk/charts">Nationwide House Price Index</a></span>
</figcaption>
</figure>
<p>While buyers may be pleased to hear forecasts of falling house prices, this is not such good news for sellers. But both sides of the market will be interested in the likely strength of any housing market correction. </p>
<p>The busts of the late 1980s and 2000s followed similar price booms to the one we have just experienced. These periods show that, if a widely <a href="https://www.theguardian.com/business/2022/jul/26/imf-slashes-global-growth-forecast-as-top-three-economies-stall">expected recession</a> follows the current slowdown in house prices, the market could fall more sharply and then experience a longer-term chilling effect. In other words, homeowners and prospective buyers can expect a correction, rather than a crash, followed by a slow recovery. </p>
<h2>1980s revival</h2>
<p>House prices are typically affected by three factors:</p>
<ul>
<li><p>Real incomes (or incomes adjusted for inflation), which are currently being <a href="https://www.ons.gov.uk/employmentandlabourmarket/peopleinwork/employmentandemployeetypes/bulletins/averageweeklyearningsingreatbritain/latest">squeezed</a> by the cost of living crisis as wages do not keep up with <a href="https://www.ons.gov.uk/economy/inflationandpriceindices/bulletins/consumerpriceinflation/june2022">rising inflation</a> – this affects people’s ability to afford a new home.</p></li>
<li><p>Interest rates, which are also <a href="https://www.theguardian.com/business/2022/jun/16/bank-of-england-raises-interest-rates-to-125-to-tackle-inflation">on the rise</a> as the Bank of England tries to address inflation – this means it is more costly to borrow money for a mortgage on a home.</p></li>
<li><p>The availability of mortgage finance, which enables people to borrow money for a new home – this is currently <a href="https://www.fca.org.uk/data/commentary-mortgage-lending-statistics-q1-2022">fairly stable</a>.</p></li>
</ul>
<p>The UK housing market downturn that started in the 1980s saw <a href="https://researchportal.hw.ac.uk/en/publications/housing-markets-and-planning-policy">prices fall</a> in absolute terms for the first (recorded) time, and this continued until 1994. It was not until 1997 that house prices began to rise again by more than 5% per annum. Annual house price inflation then persisted above this level for the next 10 years until its peak in the final part of 2007. </p>
<p>During the recession that followed the 2008 global financial crisis, house prices <a href="https://www.emerald.com/insight/content/doi/10.1108/IJHMA-10-2012-0052/full/html">fell consistently</a> across all regions until the spring of 2009. The national average drop was 21% during this time, with regional variations ranging from 20% to 26% (not including Northern Ireland). The highest percentage declines were in the southern regions of England.</p>
<p>The anatomies of these two busts were very different, even though both saw a fall in nominal (non-inflation adjusted) prices linked to recession. The 1990s downturn was driven by forced property sales due to extreme interest rates and high unemployment – households that were in negative equity were unable to make their mortgage payments. </p>
<p>In contrast, the downturn of the late 2000s saw relatively <a href="https://www.ons.gov.uk/employmentandlabourmarket/peopleinwork/articles/anoverviewoftheuklabourmarket/2015-02-27#:%7E:text=Employment%20rate%20for%20people%20aged%2016%20to%2064%2C%20UK%2C%201980%20to%202014">high unemployment</a> but <a href="https://www.bankofengland.co.uk/boeapps/database/Bank-Rate.asp">low interest rates</a>, which still generated a fall in house prices. During this time, the market was particularly negatively affected by banks’ <a href="https://www.emerald.com/insight/content/doi/10.1108/IJHMA-10-2012-0052/full/html">widespread withdrawal</a> of mortgage finance in the wake of the financial crisis due to their financial collapse, leading in some cases to <a href="http://news.bbc.co.uk/1/hi/business/7249575.stm">nationalisation</a>. Their priority was rebuilding their capital base rather than lending. Reductions in <a href="https://fortune.com/2020/10/07/boris-johnson-generation-buy-5-mortgage-plans-risk-financial-crisis/#:%7E:text=as%20banks%20naturally%20pulled%20back%20on%20lending.">loan to value ratios</a> (the amount a bank is willing to lend as a percentage of the property price) from 95% to 75% significantly reduced buyers’ purchasing power.</p>
<p>In both of these periods, recessions caused a house price collapse, but not all recessions actually lead to a price drop. The recessions of the mid-1970s and early 1980s only caused real house prices to fall – that is, they declined in line with inflation, rather than seeing an actual fall in value. One reason may be that these recessions occurred prior to the rise in lower-income owner occupation through schemes like <a href="https://www.bigissue.com/news/housing/right-to-buy-at-40-the-controversial-policy-that-transformed-lives/">right-to-buy</a> that were launched in the 1980s. Such households are more susceptible to financial difficulties during recessions.</p>
<p>The good news for homeowners then is that house prices do not typically fall unless there is a recession, and even then it is only a possibility. On the other hand, the current <a href="https://www.bbc.co.uk/news/business-57764601">rising interest rate</a> environment in the UK could have significant consequences for monthly household budgets. Together with mounting living costs, this would increase mortgage costs, perhaps even making them unaffordable for some homeowners. It might be possible to address this to some extent by remortgaging, however.</p>
<p>Past experience of UK house price corrections shows that the recovery from a downturn can be slow, taking many years. During this time, opportunities to move up the property ladder – to upgrade in line with growing family needs, for example – will be limited. Modest or no increases in house prices also mean that households do not accumulate the deposit needed for a new mortgage for a more expensive house. </p>
<p>So, the prospect of a global recession in 2023 means there is the potential for falling house prices, and even a correction could have a prolonged negative effect on the housing market. In other words, the UK housing market could be facing a long-term period of stagnation.</p><img src="https://counter.theconversation.com/content/186072/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Colin Jones does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>History indicates house prices are more likely to see a correction and prolonged stagnation, not a crashColin Jones, Professor of Real Estate, Heriot-Watt UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1811042022-04-19T14:55:10Z2022-04-19T14:55:10ZHousing co-ops could solve Canada’s housing affordability crisis<figure><img src="https://images.theconversation.com/files/457794/original/file-20220412-12-vgnvtx.jpg?ixlib=rb-1.1.0&rect=26%2C0%2C3000%2C1998&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">European countries have embraced housing co-ops for decades to address housing affordability. Why not Canada?</span> <span class="attribution"><span class="source">(Piqsels)</span></span></figcaption></figure><p>The housing affordability crisis seems impossible to solve. Policies intended to help people priced out of the market often serve to fan the flames and increase costs. </p>
<p>An example is <a href="https://budget.gc.ca/2022/report-rapport/chap1-en.html#2022-2">tax-free down payment plans like the one just announced in the federal 2022 budget</a>, which can drive up prices by allowing more buyers to compete for available units.</p>
<p>To make housing truly affordable, governments need to take a different approach. The budget takes a small step in the right direction by allocating $500 million of direct funding and $1 billion in loans to create more non-profit housing co-operatives.</p>
<p><a href="https://torontoist.com/2014/03/co-op-housing-what-it-is-and-how-it-works/">Non-profit housing co-operatives are mixed-income, multi-unit projects that are jointly managed by residents.</a> In the early years, seed funding came from unions and churches. But starting in the 1970s, <a href="https://torontoist.com/2014/03/co-op-housing-what-it-is-and-how-it-works">the federal government provided financial support in the form of government-backed mortgages and subsidies to low-income tenants</a></p>
<p>Members of housing co-ops qualify for either market units — they pay the full rent but the price is lower than what’s charged by private landlords, since no profit is extracted — or subsidized units, meaning they contribute a percentage of their income, which is topped up by a government subsidy. </p>
<p>Once the building’s mortgage is paid off, the fees charged to co-op residents are low because they only cover maintenance costs. The units remain affordable in perpetuity, and the cost of the government subsidy decreases over time.</p>
<h2>Looking to the past for solutions now</h2>
<p><a href="https://www.thecanadianencyclopedia.ca/en/article/co-operative-movement">Co-operative housing is just one part of a broader co-operative movement that emerged in the mid-19th century</a> as a way to address the new inequalities caused by urbanization and industrialization. </p>
<p><a href="https://doi.org/10.4324/9781315468853">The Rochdale Equitable Pioneer Society</a> was a group of English weavers who founded more than just a co-operative shop. They adopted seven core principles that ensured that economic activity was tied to the needs of members rather than the profit of investors. </p>
<figure class="align-center ">
<img alt="A black and white photo show a group of men sitting around a table." src="https://images.theconversation.com/files/458187/original/file-20220414-26-adhb4o.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/458187/original/file-20220414-26-adhb4o.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=358&fit=crop&dpr=1 600w, https://images.theconversation.com/files/458187/original/file-20220414-26-adhb4o.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=358&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/458187/original/file-20220414-26-adhb4o.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=358&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/458187/original/file-20220414-26-adhb4o.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=450&fit=crop&dpr=1 754w, https://images.theconversation.com/files/458187/original/file-20220414-26-adhb4o.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=450&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/458187/original/file-20220414-26-adhb4o.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=450&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">The founding members of the Rochdale Equitable Pioneer Society, circa 1870.</span>
<span class="attribution"><span class="source">Hamburg Co-operative Museum</span>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span>
</figcaption>
</figure>
<p>These principles included open membership, democratic control, rules for allocating profit and promotion of education. At the core of the philosophy is the idea that property has a social function of ensuring that all members of society flourish.</p>
<p>In a period when <a href="https://doi.org/10.1111/jpm.12212">homelessness and housing costs have reached crisis levels</a>, it’s time to look to the past to see what solutions have worked. </p>
<p><a href="https://chfcanada.coop/about-co-op-housing/history-of-co-op-housing/">In the 1970s, Canada invested heavily in co-operative housing</a>, and some provinces also implemented their own programs. <a href="https://chfcanada.coop/your-region/ontario-region/about-ontario-region/co-operative-housing-in-ontario/">Today, 125,000 people live in non-profit housing co-ops across Ontario.</a> </p>
<p>Mixed income housing co-operatives were a key component of the redevelopment of the St. Lawrence neighbourhood in downtown Toronto, which is now considered one of the city’s most vibrant areas. <a href="https://archive.org/details/lessons-from-st-lawrence-for-regent-park-toronto-redevelopment-2003">Seventy per cent of the first two phases were developed by non-profit housing organizations, and co-ops continue to anchor affordability in the downtown core.</a> </p>
<p><div data-react-class="Tweet" data-react-props="{"tweetId":"1281027537926344706"}"></div></p>
<h2>Lessons from Europe</h2>
<p>The relatively small size of the Canadian co-operative sector may lead some to conclude that it’s a nice idea, but not a realistic strategy for tackling an enormous problem. Others might argue it’s unfair that some people will benefit from lower costs while others continue to be rent-burdened. </p>
<p>The experience of European countries, however, shows that this approach can be scaled up to provide a comprehensive, fair solution to housing affordability.</p>
<p><a href="https://www.housingeurope.eu/member-24/gbv">In Austria, 20 per cent of all housing and 40 per cent of multi-family housing is non-profit</a>. In Vienna, <a href="https://www.newstatesman.com/spotlight/2019/09/housing-basic-human-right-vienna-model-social-housing">60 per cent of residents live in units either owned by the municipal government or in state-subsidized, non-profit co-operatives</a>. A one-bedroom co-op apartment <a href="https://www.euronews.com/2018/10/30/vienna-battles-rising-housing-costs-can-a-new-policy-fix-it">rents for around $400 in the city</a>.</p>
<p>There is political support across the ideological spectrum in Austria, ensuring that the supply of high-quality co-operative housing keeps up with demand.</p>
<figure class="align-center ">
<img alt="A sloping apartment building with greenery on all the balconies." src="https://images.theconversation.com/files/457793/original/file-20220412-22029-dd8itp.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/457793/original/file-20220412-22029-dd8itp.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/457793/original/file-20220412-22029-dd8itp.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/457793/original/file-20220412-22029-dd8itp.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/457793/original/file-20220412-22029-dd8itp.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=502&fit=crop&dpr=1 754w, https://images.theconversation.com/files/457793/original/file-20220412-22029-dd8itp.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=502&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/457793/original/file-20220412-22029-dd8itp.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=502&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">The residential co-op building Alterlaa in Vienna. It was built in the 1970s for low-income households.</span>
<span class="attribution"><span class="source">(Shutterstock)</span></span>
</figcaption>
</figure>
<p>Given that co-operative housing in Canada has been extremely successful, what accounts for its marginal role in contemporary housing policy? </p>
<p>It’s partly due to the economic crisis <a href="https://doi.org/10.2307/135086">that hit Canada in the 1980s</a>. Global inflation, industrialization and skyrocketing interest rates led to a government debt crisis, and <a href="http://www.borealispress.com/underconstruction.html">federal funding for housing programs dried up.</a></p>
<p>When the crisis receded, the market fundamentalism of Ronald Reagan and Margaret Thatcher — <a href="https://www.cnn.com/2013/04/08/politics/thatcher-reagan/index.html">conservative politicians who advocated low taxes, deregulation and privatization</a> — had made it difficult for some to regard government as a solution rather than a problem. </p>
<h2>Cost-effective</h2>
<p>Co-operatives, however, are extremely cost-effective because they almost never default on their mortgages, which is why the federal government hopes to leverage $500 million to build 6,000 units, an investment of $83,000 per unit. A closer look at the budget, however, reveals that only $191 million is committed in the next five years, all of it reallocated from other programs. </p>
<p>The supply of new housing in Toronto <a href="https://www.theglobeandmail.com/business/article-census-data-shows-torontos-housing-units-growing-faster-than/">has increased at a faster rate than population growth.</a> This tells us that increasing supply alone is not the answer. <a href="https://www.scmp.com/business/article/3173326/canada-prepares-ban-most-foreigners-buying-homes-two-years-control-soaring">Nor can we blame foreign investors, who make up only 2.2 per cent of buyers in Ontario’s red-hot real estate market.</a> </p>
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Read more:
<a href="https://theconversation.com/federal-election-2021-more-supply-wont-solve-canadas-housing-affordability-crisis-167620">Federal election 2021: More supply won't solve Canada's housing affordability crisis</a>
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<p><a href="https://www.bnnbloomberg.ca/speculators-distorting-canadian-housing-market-economists-warn-1.1572784">The actual speculators are regular homeowners</a> who are leveraging themselves, knowing that capital gains from a primary residence are tax-free. Housing activists also point out that <a href="https://acorncanada.org/capital-current-housing-activists-condemn-ontario-bill">new luxury condos don’t increase the supply of affordable units</a>. </p>
<p>In theory, the construction of high-priced units should lower prices by decreasing competition for cheaper units, but in practice it hasn’t worked that way. It’s a good idea to increase the supply of housing by making it easier to <a href="https://www.ontario.ca/document/stormwater-management-planning-and-design-manual/infill-development">redevelop under-developed land or properties</a>, but this should be part of an affordability strategy that prioritizes co-operatives. </p>
<p>The goal of housing for all cannot be achieved through the market alone. Co-operative housing offers a viable solution that could substantially ease the housing affordability crisis.</p><img src="https://counter.theconversation.com/content/181104/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Margaret Kohn receives funding from The Social Sciences and Humanities Research Council of Canada (SSHRC) </span></em></p>In a period when homelessness and housing costs have reached crisis levels, it’s time to look at housing co-operatives as a potential game-changer.Margaret Kohn, Professor of Political Science, University of TorontoLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1715432021-12-22T10:50:53Z2021-12-22T10:50:53ZFive climate-related factors to consider before buying a home<p>In the UK, where house prices have reached <a href="https://www.independent.co.uk/money/average-uk-house-price-hits-record-high-of-ps270-000-b1959188.html">historic highs</a> and there is a <a href="https://www.reuters.com/world/uk/uk-house-price-climb-slows-homes-shortage-deepens-rics-2021-10-13/">shortage of homes</a> available, the pressure on the property market is stark.</p>
<p>And as with any market these days, there are environmental factors to consider. So for those who can afford to buy their own home, it is worth remembering that within the lifetime of a mortgage (typically around 30 years) the climate will be very different from today – with a significant impact on property prices. </p>
<p>For example, the <a href="https://www.metoffice.gov.uk/services/insights/future-weather-forecast-for-2050">Met Office predicts</a> that by 2050 average temperatures in the UK could increase by 1.7°C. There will also be more frequent and longer lasting heat waves, more extreme rainfall, and more regular and powerful storms.</p>
<p>So here are five things for home-buyers to take into account beyond living space and local amenities:</p>
<h2>1. Connectivity</h2>
<p>Working from home may be here to stay, but the need to travel will not disappear completely. And as the pressure to reduce individual car use becomes more intense and <a href="https://theconversation.com/birmingham-plans-to-become-a-supersized-low-traffic-neighbourhood-will-it-work-170131">low-traffic neighbourhoods</a> become increasingly common, being able to walk, cycle or use public transport will be highly prized. <a href="https://www.sciencedirect.com/science/article/abs/pii/S0967070X21002377">Research shows</a> that good access to public transport is reflected in higher house prices.</p>
<p>“Walkable” neighbourhoods and areas with off-road cycle paths are also more expensive, indicating <a href="http://www.niagaraknowledgeexchange.com/wp-content/uploads/sites/2/2016/04/value-of-cycling.pdf">financial value</a> in the ability to ditch cars.</p>
<p>For staying in, a reliable and fast internet connection is important – so much so that homes with the best connections <a href="https://www.telegraph.co.uk/property/house-prices/high-cost-slow-broadband-sluggish-internet-speeds-hitting-house/">are worth more</a> than those without. </p>
<h2>2. Insulation</h2>
<p>With energy prices rising, keeping the warmth in during the winter and excess heat out during the summer makes sense economically and environmentally. But before rushing to replace gas boilers with heat pumps, the focus should be on increasing the thermal <a href="https://onehome.org.uk/your-home/19-warm-and-cosy-homes/265-how-much-could-you-save-by-insulating-your-home">performance of a building</a>. </p>
<p>Cavity and loft insulation are simple and cost effective, as is upgrading windows (unless it’s a listed building where double glazing may <a href="https://historicengland.org.uk/images-books/publications/eehb-secondary-glazing-windows/heag085-secondary-glazing/">not be permitted</a>). But many homes require more bespoke measures. </p>
<p>Solutions to the insulation of solid brick walls (a common construction for terraced houses), for example needs to be detailed in a way to avoid <a href="https://www.sciencedirect.com/science/article/abs/pii/S0378778814010822">condensation and mould growth</a>. It is worth <a href="https://www.architecture.com/knowledge-and-resources/knowledge-landing-page/the-six-principles-for-retrofitting-a-house-to-meet-net-zero-targets">seeking advice</a> when it comes to energy efficiency upgrades to existing housing stock. </p>
<h2>3. Sewerage</h2>
<p>Climate change increases the risk of <a href="https://www.ofwat.gov.uk/regulated-companies/resilience-in-the-round/climate-change/">surface water and sewer flooding</a> because more <a href="https://www.metoffice.gov.uk/about-us/press-office/news/weather-and-climate/2021/future-extreme-rainfall-more-extreme-than-first-thought">frequent heavy downpours</a> will inundate drainage systems. Flooding such as that <a href="https://inews.co.uk/news/uk/london-flooding-brian-may-belongings-ruined-flash-floods-home-1101697">seen in London</a> in July 2021 will be more commonplace.</p>
<p>Sewer flooding is as disgusting as is sounds, and it is worth checking sewer maps to see if a house is exposed to this risk. The treatment of sewage is being affected by climate change due to reduced river flows in <a href="https://www.ofwat.gov.uk/regulated-companies/resilience-in-the-round/climate-change/">hotter summers</a> which, combined with the lack of <a href="http://saveobwater.com/Privatization/privatizationfiascos.pdf">infrastructure investment</a>, will lead to more untreated (or partially treated) sewage being released into <a href="https://doi.org/10.1007/978-3-319-10467-6_10">rivers and the sea</a>.</p>
<h2>4. Trees</h2>
<p>The right tree in the right place is the key to <a href="https://indiana-arborist.org/wp-content/uploads/2017/03/TreesAndStormsFNRFQ-12W.pdf">tree management</a> around a home. Many locations will experience more frequent and <a href="https://agupubs.onlinelibrary.wiley.com/doi/full/10.1029/2006GL027663">severe storms</a>, so it is advisable to take note of the position and health of large trees, and the direction of prevailing winds. </p>
<figure class="align-center ">
<img alt="Fallen tree leans on house." src="https://images.theconversation.com/files/438680/original/file-20211221-21-1h7faqx.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/438680/original/file-20211221-21-1h7faqx.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=401&fit=crop&dpr=1 600w, https://images.theconversation.com/files/438680/original/file-20211221-21-1h7faqx.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=401&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/438680/original/file-20211221-21-1h7faqx.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=401&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/438680/original/file-20211221-21-1h7faqx.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/438680/original/file-20211221-21-1h7faqx.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/438680/original/file-20211221-21-1h7faqx.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Natural risks.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/tree-falls-on-home-multifamily-housing-453299347">Shutterstock/Karen Hermann</a></span>
</figcaption>
</figure>
<p>A more <a href="http://news.bbc.co.uk/1/hi/uk/4091068.stm">Mediterranean climate</a> will also lead to increased risk of forest fires. In 2019, Ashdown Forest in East Sussex was <a href="https://www.bbc.co.uk/news/uk-england-sussex-48090078">partially destroyed</a> by fire, one of around <a href="https://www.forestresearch.gov.uk/research/climate-change-impacts/forest-fires-and-climate-change/">9,000 wild fires</a> reported in the UK that year. </p>
<p>But trees are a vital part of the solution to minimising climate change and large-scale tree planting is <a href="https://thenorthernforest.org.uk/#:%7E:text=We%27re%20planting%20at%20least,%2C%20Sheffield%2C%20York%20and%20Hull">taking place</a> across the UK. When buying a new home you may want to consider planting a tree to the south of the house, where they can provide <a href="https://eco-intelligent.com/2020/05/23/why-is-it-cooler-around-trees/">natural shade</a> as well as improving air quality and reducing traffic noise. </p>
<p>It is important to remember when planting trees now that you are planting for the climate in the decades to come, when the species of tree suitable <a href="https://www.forestresearch.gov.uk/research/climate-change-impacts/climate-change-impacts-and-adaptation-in-englands-woodlands/species-and-provenance-choice-for-adapting-englands-woodlands/">will be different</a>. </p>
<h2>5. Elevation</h2>
<p>A sea view or the sound of a nearby babbling brook have long been seen by estate agents as strong selling points. But they bring risks too. </p>
<p>Heavier rainfall will continue to cause dramatic and sometimes <a href="https://www.theguardian.com/environment/2021/aug/23/climate-crisis-made-deadly-german-floods-up-to-nine-times-more-likely">catastrophic flooding</a>, and homes known to be at risk from flooding will be more expenive to insure. </p>
<p>In extreme situations homes may be denied insurance cover and lenders may refuse to <a href="https://www.onlinemortgageadvisor.co.uk/property-types/flood-zone/">provide a mortgage</a>. Yet many thousands of new homes continue to be <a href="https://eandt.theiet.org/content/articles/2021/07/uk-homes-are-not-sufficiently-protected-from-climate-change-risk-aviva-warns/">built on flood plains</a>. </p>
<p>Sea levels are rising, with coastal towns and cities set to <a href="https://www.theguardian.com/environment/commentisfree/2021/apr/13/sea-level-rise-climate-emergency-harold-wanless">become unrecognisable</a>. Researchers have also <a href="https://doi.org/10.1038/S41558-020-0874-1">now made links</a> between sea level rises and groundwater level rises, which can affect the foundations of a home as well as <a href="https://www.environmentalevidence.org/">underground service connections</a>. </p>
<p>The risks associated with these changes will be priced into the value of property in the future. But it is already having an effect. A <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3073842">recent study</a> of house prices in low-lying coastal areas in the US showed that homes exposed to future sea level rise were generally 7% less expensive than neighbours on higher ground. </p>
<p>Even if your neighbourhood escapes the worst of the climate changes in the next few decades, when you eventually decide to sell up, remember that future buyers and their mortgage companies will be considering the 30 years beyond that date – when the effects of climate change will be <a href="https://www.ft.com/content/31d5498f-38d8-4b35-a149-b5fbd7ad28b6">even more severe</a>.</p><img src="https://counter.theconversation.com/content/171543/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Chris Medland is a member of the Royal Institute of British Architects and affiliated with The Green Party</span></em></p>Our surroundings will be very different over the duration of a typical mortgage.Chris Medland, PhD Candidate, University of SurreyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1698092021-11-25T20:34:50Z2021-11-25T20:34:50ZWant to solve the housing crisis? Address super-charged demand<figure><img src="https://images.theconversation.com/files/433526/original/file-20211123-19-sudh2d.JPG?ixlib=rb-1.1.0&rect=0%2C0%2C6016%2C4007&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">A house in Ottawa that sold over the listing price. </span> <span class="attribution"><span class="source">THE CANADIAN PRESS/Justin Tang </span></span></figcaption></figure><iframe style="width: 100%; height: 175px; border: none; position: relative; z-index: 1;" allowtransparency="" src="https://narrations.ad-auris.com/widget/the-conversation-canada/want-to-solve-the-housing-crisis-address-super-charged-demand" width="100%" height="400"></iframe>
<p>A <a href="https://nationalpost.com/news/canada/could-new-zealands-radical-new-housing-law-help-canada-curb-its-skyrocketing-real-estate-prices">recent news item about New Zealand’s radical new housing law</a> and whether such measures could work in Canada implies that soaring home prices are due to a lack of supply. </p>
<p>In its election platform, the <a href="https://liberal.ca/our-platform/1-4-million-new-homes/">Liberal party proposed to invest $4 billion in a municipal supply accelerator</a> aimed at building more housing. This is the wrong approach.</p>
<p>If policy-makers and the newly re-elected government want to improve housing affordability and the ability of young families to become homeowners, they need to turn their attention to the primary driver of price increases — <a href="https://financialpost.com/opinion/george-fallis-supply-isnt-the-whole-housing-problem-the-growing-demand-for-more-house-is-too">super-charged demand</a>, abetted by the sacred cow of <a href="https://www.cpacanada.ca/en/news/canada/2021-02-12-principal-residence-exemption">non-taxation of capital gains on a principal residence</a>.</p>
<p>A chorus of voices, <a href="https://www.theglobeandmail.com/business/article-things-are-heating-up-again-toronto-home-prices-climbed-in-october-as/">from bank economists</a> to the <a href="https://www.bnnbloomberg.ca/real-estate/video/canada-s-housing-market-faces-supply-shortage-economist%7E1725889">real estate industry</a>, perpetuate the argument that the primary cause of skyrocketing house prices is lack of supply. This view has been reinforced <a href="https://www.cbc.ca/news/canada/toronto/ndp-liberals-election-platforms-toronto-ontario-1.6161531">in media reporting, and was emphasized in recent election platforms</a>.</p>
<p>This “lack of supply” view draws on basic Economics 101 textbooks, where using the example of widgets and a simple supply and demand curve, an increase in supply causes a reduction in price. </p>
<p>But houses are not widgets. They are unique entities, both a basic need and, increasingly, an investment commodity. They are also fixed in location and their values reflect the attributes of the locales that purchasers value and are willing to pay a premium for.</p>
<hr>
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<em>
<strong>
Read more:
<a href="https://theconversation.com/federal-election-2021-more-supply-wont-solve-canadas-housing-affordability-crisis-167620">Federal election 2021: More supply won't solve Canada's housing affordability crisis</a>
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</em>
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<h2>Homes outpace households</h2>
<p>Nationally between 2006 and 2016, Canada added 1.636 million households and built 1.919 million new homes, according to the <a href="https://www150.statcan.gc.ca/t1/tbl1/en/tv.action?pid=3410013501">Canada Mortgage and Housing Corporation</a> and <a href="https://www150.statcan.gc.ca/n1/daily-quotidien/171025/dq171025c-eng.htm">Census data</a>. So, on average, almost 30,000 extra homes were constructed each year compared to the increase in the number of households.</p>
<figure class="align-center ">
<img alt="A graph shows the differences between homes and households in Vancouver, Toronto, Ottawa and Montréal from 2006 to 2016" src="https://images.theconversation.com/files/433263/original/file-20211122-17-5xh2tg.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/433263/original/file-20211122-17-5xh2tg.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=363&fit=crop&dpr=1 600w, https://images.theconversation.com/files/433263/original/file-20211122-17-5xh2tg.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=363&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/433263/original/file-20211122-17-5xh2tg.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=363&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/433263/original/file-20211122-17-5xh2tg.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=456&fit=crop&dpr=1 754w, https://images.theconversation.com/files/433263/original/file-20211122-17-5xh2tg.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=456&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/433263/original/file-20211122-17-5xh2tg.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=456&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Homes versus households in major Canadian cities between 2006 and 2016, according to Canada Mortgage and Housing Corporation and Census data.</span>
<span class="attribution"><span class="source">(CMHC/Census data)</span>, <span class="license">Author provided</span></span>
</figcaption>
</figure>
<p>In Vancouver, new construction exceeded household growth by 19 per cent. In Toronto it was one per cent, and Ottawa fell short of household growth by four per cent. </p>
<p>So, in theory, between 2006 and 2016, we should have seen the greatest price growth in Ottawa and less price pressure in Vancouver. But prices increased by 93 per cent and 96 per cent in Vancouver and Toronto respectively, but by only 47 per cent in Ottawa. </p>
<p>Insufficient supply may be a contributing factor, especially in cities where household growth exceeds new home construction, but it’s not the primary or most important cause.</p>
<p>The more significant cause is demand — and not just the quantity of demand, but the quality of demand. </p>
<p>Over the last few decades we have seen a new phenomenon of super-charged demand created by households that have substantial accumulated equity from persistent appreciation in their home values, combined with strong income growth and declining and historically low mortgage rates.</p>
<h2>Homeowners trade up</h2>
<p>In Canada, <a href="https://creastats.crea.ca/en-CA/">we sell approximately 700,000 homes per year</a> via resales plus <a href="https://www03.cmhc-schl.gc.ca/hmip-pimh/en#TableMapChart/1/1/Canada">newly constructed homes</a>. There are 14 million households, so this represents only five per cent of all households. </p>
<figure class="align-center ">
<img alt="Two construction workers work on the roof of a house being built" src="https://images.theconversation.com/files/433532/original/file-20211123-13-1jsakcc.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/433532/original/file-20211123-13-1jsakcc.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=420&fit=crop&dpr=1 600w, https://images.theconversation.com/files/433532/original/file-20211123-13-1jsakcc.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=420&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/433532/original/file-20211123-13-1jsakcc.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=420&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/433532/original/file-20211123-13-1jsakcc.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=528&fit=crop&dpr=1 754w, https://images.theconversation.com/files/433532/original/file-20211123-13-1jsakcc.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=528&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/433532/original/file-20211123-13-1jsakcc.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=528&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">New homes are built in a housing construction development in the west end of Ottawa in May 2021.</span>
<span class="attribution"><span class="source">THE CANADIAN PRESS/Sean Kilpatrick</span></span>
</figcaption>
</figure>
<p>Many of these buyers are existing owners who are trading up. Only a quarter to one-third of buyers are first-time buyers (most in higher income brackets and with <a href="https://www.theglobeandmail.com/investing/personal-finance/article-parents-gave-their-adult-kids-more-than-10-billion-to-buy-houses-in/">parental help</a>). It’s the larger group — buyers who are trading up — that has the capacity to pay these high prices. <a href="https://www.rentalhousingbusiness.ca/cmhc-and-stats-canada-release-foreign-buyer-numbers/">Certainly a small percentage of them may also be foreign buyers</a> and <a href="https://toronto.ctvnews.ca/first-time-home-buyers-in-toronto-being-pushed-out-by-investors-1.5678556">some are investors</a>, but most are just regular households. </p>
<p>Many existing owners have <a href="https://www.cmhc-schl.gc.ca/en/professionals/housing-markets-data-and-research/housing-data/data-tables/household-characteristics/real-median-household-income-after-tax-tenure">incomes well above the median</a>. They also have substantially increased purchasing power from <a href="https://www.cbc.ca/news/business/mortgage-pre-approval-1.6242958">historically low interest rates</a>, and substantial wealth from unearned windfall gain created by years of rising prices. </p>
<p>More significantly, they undermine the concept that added supply will stall or slow the rate of pricing increases. All cities have coveted properties in desired neighbourhoods — often modest, older dwellings on sizeable lots. Because of the prime location, homes for example in inner-city Vancouver might sell for between $2 million to $3 million or in Ottawa perhaps for $800,000. </p>
<p>Developers often buy those lots, demolish the existing home and replace it with two or three contemporary new homes. The pricing will reflect the values that consumers attribute to that area, inevitably exceeding the original home price. </p>
<h2>The role of developers</h2>
<p>In central Ottawa, for example, <a href="https://www.agentinottawa.com/stats/">existing modest homes are being purchased for $600,000 to $700,000, demolished and replaced</a> with a semi with each side selling for $1.2 to $1.4 million. </p>
<p>The same thing is occurring <a href="https://www.vancouverisawesome.com/courier-archive/news/almost-1000-homes-per-year-slated-for-demolition-in-vancouver-3026242">all across the country</a>, with new homes priced well over — as much as double — what the price would have been for the existing house. That older house would have been moderately affordable to a young family if they hadn’t been outbid by the developer.</p>
<figure class="align-center ">
<img alt="A construction worker carries lumber on the roof of a home mid-build." src="https://images.theconversation.com/files/433534/original/file-20211123-27-7x7x79.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/433534/original/file-20211123-27-7x7x79.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=392&fit=crop&dpr=1 600w, https://images.theconversation.com/files/433534/original/file-20211123-27-7x7x79.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=392&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/433534/original/file-20211123-27-7x7x79.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=392&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/433534/original/file-20211123-27-7x7x79.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=493&fit=crop&dpr=1 754w, https://images.theconversation.com/files/433534/original/file-20211123-27-7x7x79.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=493&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/433534/original/file-20211123-27-7x7x79.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=493&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Builders work on a new home build in North Vancouver, B.C.</span>
<span class="attribution"><span class="source">THE CANADIAN PRESS/Jonathan Hayward</span></span>
</figcaption>
</figure>
<p>Clearly this form of intensification (<a href="https://www.realestatemagazine.ca/end-exclusionary-single-family-zoning-says-orea/">the rezoning the exclusive single-family neighbourhoods</a>) and expanded supply will do nothing to stall or slow price growth, especially given the demand from buyers with accumulated wealth seeking properties in these locations. More supply, therefore, doesn’t mean lower prices.</p>
<p>So if super-charged home purchasing power is driving up home prices, not insufficient supply, then the necessary policy response must aim to stall or suppress this demand by confiscating part of the windfall gain of accumulated appreciation. </p>
<p>This means taking on the sacred cow taxation of capital gains on homes — younger Canadians will thank them for it, and may even vote for the party that has the guts to do it.</p><img src="https://counter.theconversation.com/content/169809/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Steve Pomeroy is affiliated with the Canadian Housing Evidence Collaborative (CHEC) at McMaster, which is funded under a SSHRC/CMHC grant. </span></em></p>More housing supply doesn’t mean lower prices. If policy-makers want to make homes more affordable, they must tackle developers who drive up prices and consider taxing capital gains on homes.Steve Pomeroy, Industry Professor, Department of Health Aging and Society, McMaster UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1676202021-09-15T15:22:21Z2021-09-15T15:22:21ZFederal election 2021: More supply won’t solve Canada’s housing affordability crisis<figure><img src="https://images.theconversation.com/files/421120/original/file-20210914-13-12ub68m.jpg?ixlib=rb-1.1.0&rect=0%2C107%2C6000%2C3350&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">A four-year-old girl plays house as Liberal Leader Justin Trudeau makes a campaign stop in Mississauga, Ont., where he spoke of his party's policy on affordable housing.</span> <span class="attribution"><span class="source"> THE CANADIAN PRESS/Sean Kilpatrick </span></span></figcaption></figure><p>Few topics during the federal election campaign have garnered more attention than high house prices and a lack of housing affordability. Both <a href="https://cpcassets.conservative.ca/wp-content/uploads/2021/09/08200659/e4cd8c0115c3ea0.pdf">Conservatives</a> and <a href="https://liberal.ca/wp-content/uploads/sites/292/2021/08/a-home-for-everyone.pdf">Liberals</a> say a major problem is a lack of housing supply. To address the issue, they promise to build millions of additional houses.</p>
<p>Contrary to popular belief, high house prices are not due to supply shortages. The COVID-19 pandemic should have made this clear. Despite the <a href="https://www.bloomberg.com/news/articles/2021-03-18/canada-suffers-slowest-growth-in-population-since-world-war-i">slowest population growth since the First World War</a>, and the <a href="https://betterdwelling.com/canada-is-now-completing-18-homes-for-every-person-the-population-grows/">most number of houses built in more than a decade</a>, prices went up 27 per cent. </p>
<figure class="align-left zoomable">
<a href="https://images.theconversation.com/files/421123/original/file-20210914-19-181n9bn.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="Erin O’Toole holds up his party’s platform book" src="https://images.theconversation.com/files/421123/original/file-20210914-19-181n9bn.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/421123/original/file-20210914-19-181n9bn.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=546&fit=crop&dpr=1 600w, https://images.theconversation.com/files/421123/original/file-20210914-19-181n9bn.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=546&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/421123/original/file-20210914-19-181n9bn.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=546&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/421123/original/file-20210914-19-181n9bn.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=687&fit=crop&dpr=1 754w, https://images.theconversation.com/files/421123/original/file-20210914-19-181n9bn.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=687&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/421123/original/file-20210914-19-181n9bn.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=687&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Conservative Leader Erin O’Toole holds up his party’s platform book as he makes an announcement on affordable housing in Ottawa.</span>
<span class="attribution"><span class="source">THE CANADIAN PRESS/Ryan Remiorz</span></span>
</figcaption>
</figure>
<p>The recent spike in prices is no mere historical blip. Since 2000, prices have risen 160 per cent in inflation-adjusted dollars. Meanwhile, the supply of housing has grown in lockstep with new households, <a href="https://www150.statcan.gc.ca/n1/pub/11-630-x/11-630-x2015008-eng.htm">even as average household sizes have fallen</a>. </p>
<p>According to reports by both the <a href="https://www.imf.org/external/pubs/ft/wp/2015/wp15128.pdf">International Monetary Fund</a> and the <a href="https://www.pbo-dpb.gc.ca/en/blog/news/Household_Formation">Parliamentary Budget Office of Canada</a>, new housing completions have actually exceeded household growth for most of the 21st century, leading to historically high vacancy rates. </p>
<h2>House prices are asset prices</h2>
<p>To understand the dynamics of housing markets, we need to distinguish between two prices: the price of owning a house, and the price of renting it. </p>
<p>Rental prices represent <a href="https://www.fresheconomicthinking.com/2020/11/the-economic-price-of-housing-is-not.html">the economic cost of living</a> in a house. Like any other commodity, rent prices change, at least in theory, according to demand and supply. </p>
<p>In contrast, house prices are <a href="https://bankunderground.co.uk/2019/09/05/houses-are-assets-not-goods-what-the-difference-between-bulbs-and-flowers-tells-us-about-the-housing-market/">asset prices</a>. According to <a href="https://medium.com/@ian.mulheirn/how-economists-should-think-about-the-housing-market-ff92e4b7201b">standard economic theory</a>, they are determined by their future earnings, adjusted for risk. </p>
<p>You can think of the earnings of home ownership along the same lines as the earnings of any business: they are the difference between revenues and costs.</p>
<p>For landlords, revenues take the form of monthly rental payments. For owners/occupiers, they take the form of savings earned from not paying rent, or what are known as imputed rents. Imputed rents are included in <a href="https://www150.statcan.gc.ca/n1/pub/13-017-x/2008001/themes/ch05/5213352-eng.htm">GDP calculations</a>. In some countries, like the Netherlands and Switzerland, they are even treated as <a href="https://www.businessinsider.com/imputed-rent-hidden-tax-break-homeowners-2016-9">taxable income</a>. </p>
<figure class="align-left zoomable">
<a href="https://images.theconversation.com/files/420936/original/file-20210913-14-1ld7uel.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="A rental sign in front of an apartment complex." src="https://images.theconversation.com/files/420936/original/file-20210913-14-1ld7uel.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/420936/original/file-20210913-14-1ld7uel.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=412&fit=crop&dpr=1 600w, https://images.theconversation.com/files/420936/original/file-20210913-14-1ld7uel.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=412&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/420936/original/file-20210913-14-1ld7uel.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=412&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/420936/original/file-20210913-14-1ld7uel.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=518&fit=crop&dpr=1 754w, https://images.theconversation.com/files/420936/original/file-20210913-14-1ld7uel.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=518&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/420936/original/file-20210913-14-1ld7uel.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=518&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Rental properties are shown in Calgary in 2019.</span>
<span class="attribution"><span class="source">THE CANADIAN PRESS/Jeff McIntosh</span></span>
</figcaption>
</figure>
<p>The costs of ownership include depreciation, maintenance, property taxes, insurance, utilities and monthly interest payments. Note how mortgage principal payments are not a cost. That’s because they increase homeowners’ equity. They are a form of savings.</p>
<p>If the earnings of home ownership go up — due to rising revenues, falling costs, or both — then house prices should rise. With this framework in mind, we can now try and identify big changes that might account for skyrocketing prices. </p>
<p>In recent years, <a href="https://www.washingtonpost.com/opinions/2021/07/12/rent-prices-are-surging-thats-ominous-news-inflation-rates/">rental prices have surpassed the rate of inflation</a>, especially in major cities. But house prices have risen much, much faster than rent. Why? </p>
<h2>Falling interest rates drive up prices</h2>
<p>Recall the costs of ownership. Specifically, decades of falling interest rates have lowered the cost of borrowing a mortgage. </p>
<p>In the 1980s, rates on a conventional mortgage were 18 per cent. Today, they are closer to two to three per cent — <a href="https://financialpost.com/personal-finance/family-finance/mortgage-costs-are-less-than-rate-of-inflation-for-first-time-in-40-years">less than inflation</a>. Every time borrowing costs fall, the earnings of home ownership go up. </p>
<p>The result is predictable: buyers bid up prices and take on more debt. The same logic applies to incentives for first-time buyers. By lowering the cost of ownership, these policies contribute to the very problem they’re trying to solve: higher house prices. </p>
<p>While falling borrowing costs increase the earnings of home ownership, we also have to adjust these earnings for risk. In recent decades, declining returns on “risk-free” government bonds — a crucial benchmark in financial markets — has incentivized investors of all sorts to put their money into riskier assets, especially real estate.</p>
<p><a href="https://www.bankofengland.co.uk/working-paper/2019/uk-house-prices-and-three-decades-of-decline-in-the-risk-free-real-interest-rate">According to the Bank of England</a>, almost all the growth in house prices relative to rents (and incomes) can be explained by 35 years of unexpected declines in the risk-free rate of interest. </p>
<p>Of course, interest rates are not the only factor behind rising prices. <a href="https://doi.org/10.1068/a130226p">A government-supported, mortgage-backed security program</a>, tax subsidies and incentives for homeowners, <a href="https://globalnews.ca/news/6608644/canadian-real-estate-abysmal-anti-money-laundering-grades/">money-laundering</a> through real estate, along with speculative frenzies in major cities, all help to explain Canada’s exceptional rate of house price growth. </p>
<h2>More supply is not a solution</h2>
<p>The supply of housing matters, too. But from an asset-model perspective, supply only affects one variable in the determination of house prices — the economic cost of housing, or rent. The fact that prices have risen far beyond rent tells us that it’s due to financial factors alone — not a lack of supply. </p>
<p>Finally, there’s no guarantee that more supply will even lower prices via their impact on rent. <a href="https://housingevidence.ac.uk/wp-content/uploads/2019/08/20190820b-CaCHE-Housing-Supply-FINAL.pdf">Models show</a> that because new supply represents a small share of a large, pre-existing housing stock, even big increases in construction have relatively minor effects on prices. </p>
<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/420940/original/file-20210913-20-492x8f.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="A sold sign in front of a large house." src="https://images.theconversation.com/files/420940/original/file-20210913-20-492x8f.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/420940/original/file-20210913-20-492x8f.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=401&fit=crop&dpr=1 600w, https://images.theconversation.com/files/420940/original/file-20210913-20-492x8f.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=401&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/420940/original/file-20210913-20-492x8f.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=401&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/420940/original/file-20210913-20-492x8f.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=504&fit=crop&dpr=1 754w, https://images.theconversation.com/files/420940/original/file-20210913-20-492x8f.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=504&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/420940/original/file-20210913-20-492x8f.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=504&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">A sold sign is shown in front of a Toronto home.</span>
<span class="attribution"><span class="source">THE CANADIAN PRESS/Graeme Roy</span></span>
</figcaption>
</figure>
<p>Finally, if total supply increases to the extent that prices do fall, developers can always <a href="https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/752124/Letwin_review_web_version.pdf">slow down</a> the rate of new construction. Lucky for them, <a href="https://doi.org/10.1016/j.jhe.2020.101708">land does not depreciate like other assets</a>.</p>
<p><a href="https://www.ctvnews.ca/politics/prime-minister-justin-trudeau-promises-cities-help-to-lower-high-cost-of-housing-1.5451494">Promises to build millions of more houses</a> make it seem as though politicians are fighting hard to keep the dream of home ownership alive. In reality, it’s not a meaningful solution. But maybe that’s the point. </p>
<p>Politicians know that many of their constituents are relying on high house prices to secure their retirement or pay for their kids’ tuition, so it’s unlikely they even want prices to fall.</p><img src="https://counter.theconversation.com/content/167620/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Joel Roberts does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The fact that Canadian house prices have risen far beyond rental rates tells us that it’s due to financial factors alone — not a lack of supply. House prices are asset prices.Joel Roberts, PhD Candidate, Social and Political Thought, York University, CanadaLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1633772021-06-28T10:08:31Z2021-06-28T10:08:31ZHouse prices: the risks of a fall are higher than most people think<p>At the start of the pandemic, many analysts believed that the prices of owner-occupied housing would be heavily affected. After all, owner-occupation is a market and is influenced by the economy. It therefore seemed highly likely that house prices would fall, remembering that, across the UK, prices fell by approximately 20% from peak to trough during the global financial crisis of 2007-09. </p>
<p><strong>ONS house price index, 2006-present</strong></p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/408159/original/file-20210624-19-1t2fnjk.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="Graph showing ONS house price index over time" src="https://images.theconversation.com/files/408159/original/file-20210624-19-1t2fnjk.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/408159/original/file-20210624-19-1t2fnjk.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=347&fit=crop&dpr=1 600w, https://images.theconversation.com/files/408159/original/file-20210624-19-1t2fnjk.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=347&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/408159/original/file-20210624-19-1t2fnjk.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=347&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/408159/original/file-20210624-19-1t2fnjk.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=437&fit=crop&dpr=1 754w, https://images.theconversation.com/files/408159/original/file-20210624-19-1t2fnjk.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=437&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/408159/original/file-20210624-19-1t2fnjk.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=437&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
<span class="attribution"><a class="source" href="https://www.ons.gov.uk/economy/inflationandpriceindices/bulletins/housepriceindex/march2021">Office for National Statistics</a></span>
</figcaption>
</figure>
<p>Since UK GDP <a href="https://www.ons.gov.uk/economy/grossdomesticproductgdp">fell by “only”</a> 6% between the first quarter of 2008 and the third quarter of 2009, the 20% fall in GDP in the second quarter of 2020 alone might have been expected to trigger an even larger housing response. </p>
<p>The UK government’s Office for Budget Responsibility (OBR) was of a similar view: in its <a href="https://obr.uk/efo/economic-and-fiscal-outlook-november-2020/">November 2020 forecast</a>, it projected a 9% fall in house prices between the end of 2020 and the beginning of 2022 (before stripping out inflation). However, in its most recent projections (<a href="https://obr.uk/efo/economic-and-fiscal-outlook-march-2021/">March 2021</a>), price growth has been revised upwards; although prices are still expected to fall slightly through 2022, they are forecast to remain well above 2020 levels. So what’s <a href="https://www.bankofengland.co.uk/speech/2021/may/jon-cunliffe-speech-at-the-law-societys-online-property-section-convention">going on</a>?</p>
<h2>The surprise rise in prices</h2>
<p>The OBR’s revision to its forecast <a href="https://www.ons.gov.uk/economy/inflationandpriceindices/bulletins/housepriceindex/march2021">reflects the fact</a> that there has been a rise in UK house prices recently. At approximately 9%, the annual rise in prices in the first four months of 2021 is the highest since 2014. </p>
<p>On one level, such forecasts should not have been so wrong, since the key influences on house prices are fairly well understood as a result of decades of research. <a href="https://bristoluniversitypress.co.uk/understanding-affordability">They are</a> household incomes, interest rates, the availability of credit, the supply of homes, and any tax advantages to ownership. </p>
<p>However, a problem for forecasting is that house prices are highly sensitive to changes in incomes and interest rates. Therefore, small errors in predicting these variables lead to even bigger errors in forecasting house prices. Consequently, considerable caution is needed with any short-term house-price forecasts.</p>
<p>One view is that prices have been saved from falling during the pandemic by the combination of low interest rates and a stamp duty holiday. Both points certainly have merit. There is strong empirical evidence that low interest rates have a major effect on prices if supported by adequate mortgage credit. And when transaction costs were lowered by the suspension of <a href="https://www.thetimes.co.uk/money-mentor/article/stamp-duty-holiday-extended/#:%7E:text=Chancellor%20Rishi%20Sunak%20introduced%20the,run%20until%20September%2030%2C%202021.">stamp duty</a> in July 2020 and its later extension in March 2021, housing sales rose sharply, which is also likely to have driven up prices. </p>
<p>However, this doesn’t tell the complete story. Household disposable income is one of the main determinants of housing demand and prices. As you can see from the graph below, it was much less affected than GDP in 2020, having been supported by the government furlough scheme. By the end of the year, it had returned to its pre-pandemic level. </p>
<p>As <a href="https://bristoluniversitypress.co.uk/understanding-affordability">an approximation</a>, a 1% reduction in real income has historically led to about a 2% reduction in house prices. So if incomes had fallen at the same rate as GDP, we may have experienced a double-digit fall in prices.</p>
<p><strong>Real household income and GDP (annual % changes)</strong></p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/408166/original/file-20210624-13-1tzamkp.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="Graph plotting real household income and GDP over time" src="https://images.theconversation.com/files/408166/original/file-20210624-13-1tzamkp.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/408166/original/file-20210624-13-1tzamkp.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=374&fit=crop&dpr=1 600w, https://images.theconversation.com/files/408166/original/file-20210624-13-1tzamkp.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=374&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/408166/original/file-20210624-13-1tzamkp.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=374&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/408166/original/file-20210624-13-1tzamkp.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=469&fit=crop&dpr=1 754w, https://images.theconversation.com/files/408166/original/file-20210624-13-1tzamkp.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=469&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/408166/original/file-20210624-13-1tzamkp.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=469&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
<span class="attribution"><span class="source">Office for National Statistics</span></span>
</figcaption>
</figure>
<h2>What happens next?</h2>
<p>So are we safe from a future slump? There are numerous conventional reasons to at least expect some slowdown in the growth of prices. These would include the potential for <a href="https://www.thetimes.co.uk/article/inflation-fears-mount-as-prices-rise-at-fastest-pace-in-two-decades-6lcs5hmdv#:%7E:text=The%20survey%20will%20fuel%20fears,the%20Bank%20of%20England%20expected.">rising inflation</a> and <a href="https://www.theguardian.com/business/2021/jun/24/bank-of-england-rejects-interest-rate-rise-despite-inflation-worries">higher interest rates</a>, the <a href="https://brodies.com/insights/employment-and-immigration/furlough-extended-until-30-september-2021-key-information-for-employers/">ending of furlough</a> in September, the end of the <a href="https://www.bbc.co.uk/news/business-53319433">stamp duty holiday</a> on July 1, and public spending limitations as a result of the <a href="https://commonslibrary.parliament.uk/research-briefings/sn06167/#:%7E:text=The%20current%20budget%20deficit%20was,equivalent%20to%2011.8%25%20of%20GDP.">pandemic overspend</a>. </p>
<p>But there is a further reason for concern – the nature of house-price risk. Housing is an asset with both risk and return, and it is surprising that limited attention is generally paid to the former in forecasts. </p>
<p>The fact that house prices have been rising quickly over the last year makes the market more vulnerable to external shocks to the economy such as a financial crisis or a sharp rise in the price of oil. <a href="https://journals.sagepub.com/doi/10.1177/0042098020976019">This is because</a> when housing comprises a higher proportion of the average household’s wealth than usual – it’s <a href="https://www.ons.gov.uk/peoplepopulationandcommunity/personalandhouseholdfinances/incomeandwealth/bulletins/totalwealthingreatbritain/april2016tomarch2018">usually around 60%</a> excluding pensions, but will be higher now because of rising house prices – the market is more prone to slow down in response to an external shock. This is because some property investors, particularly those with more than one property, will stop buying, which reduces demand. </p>
<p>By their nature, unexpected shocks are largely unpredictable. This is a further reason why forecasting the housing market is so difficult. Just because we have not observed a major downturn in prices so far as a result of the pandemic, complacency is not in order. It may mean that house-price growth is being over-predicted.</p><img src="https://counter.theconversation.com/content/163377/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Geoff Meen does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>House prices have been stronger than most had expected at the start of the pandemic, but can they continue rising?Geoff Meen, Professor Emeritus in Economics, University of ReadingLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1518302020-12-20T20:11:08Z2020-12-20T20:11:08Z2020 hindsight: can New Zealand apply the political lessons of COVID-19 in the year ahead?<p>An <a href="https://www.colmarbrunton.co.nz/what-we-do/1-news-poll/">end-of-year political poll</a> appeared recently and virtually no one paid it any attention. After a year of high-stakes health, economic and electoral events, it was a sign New Zealanders are on the other side of something.</p>
<p>It was a reminder, too, that politics is the exception rather than the norm for most people. With the 2020 election behind us, and Prime Minister Jacinda Ardern’s government rapidly adjusting to the pleasures of life with a <a href="https://www.rnz.co.nz/news/political/432137/week-in-politics-labour-shows-what-a-majority-government-can-do">parliamentary majority</a>, for most of us other things — summer, Christmas, the <a href="https://www.rnz.co.nz/news/business/430418/house-prices-rise-nearly-20-percent-in-a-year-to-median-725k">horrendous cost</a> of buying or renting a house — now take priority. </p>
<p>But before 2020 fades entirely from view, it’s as well to reflect on one or two aspects of the extraordinary year that was. </p>
<p>As might be expected in a nation that covets the status of underdog, New Zealanders took some pride in having <a href="https://www.scoop.co.nz/stories/PO2005/S00182/global-survey-shows-new-zealand-is-the-best-performing-western-country-for-covid-19-response.htm">out-performed</a> many other countries on matters COVID-related. From that performance a couple of important lessons can be drawn. </p>
<p>The first is that the country can, when needs must, rise to complex challenges. Not perfectly, to be sure — <a href="https://www.newsroom.co.nz/ideasroom/covid-19-lays-inequality-in-nz-bare">we were never all in this together</a>. But 2020 made it clear that, when required, the formal and the volitional rules that shape our behaviour and govern our social interactions can bend and adapt for the better. </p>
<p>The second is that, in the main, our institutions work. We have our fair share of liars and manipulators on social and in other forms of media, but our scientific, cultural, political and administrative institutions worked when we needed them to.</p>
<h2>Time to apply those COVID lessons</h2>
<p>The challenge now is to to apply this collective capacity to other issues — the <a href="https://www.theguardian.com/world/2020/dec/02/new-zealand-declares-a-climate-change-emergency">climate crisis</a>, <a href="https://www.theguardian.com/world/2020/aug/31/new-zealands-astounding-wealth-gap-challenges-our-fair-go-identity">inequality</a> of all kinds, the disgrace of racism — before we all snap back into conventional shape. </p>
<p>On this count there is no case for self-congratulation. Rather, there are worrying indications we are slouching back to a form of politics many hoped we had left behind.</p>
<p>The fizz and energy of early-pandemic thinking about different ways of being and doing is being replaced by the existential pull of the desire for “normality” (a pre-virus state of affairs that worked for some but not all) as we begin to emerge, emotionally and often economically wrung out, from COVID.</p>
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Read more:
<a href="https://theconversation.com/by-declaring-a-climate-emergency-jacinda-ardern-needs-to-inspire-hope-not-fear-151021">By declaring a climate emergency Jacinda Ardern needs to inspire hope, not fear</a>
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<p>Jacinda Ardern is arguably the perfect politician for such circumstances. Often characterised as a 21st century politician, she is also very much a politician of the last century: a centrist who plays to deeply entrenched shibboleths around taxation and home ownership that indulge the interests of an older generation of property owners (and voters). </p>
<p>At the same time, more and more New Zealanders are finding themselves locked out of the “Kiwi dream”. Witness the fact that home ownership has dropped to its <a href="https://www.stuff.co.nz/life-style/homed/housing-affordability/123629581/home-ownership-at-lowest-level-since-1951">lowest level</a> since 1951.</p>
<h2>Ardern’s historic choice</h2>
<p>Ardern has an acute sense of the location of the political centre. The risk is that in the interests of keeping together the electoral coalition of Labourites and disaffected former National Party voters that delivered her <a href="https://www.stuff.co.nz/national/politics/300135131/election-2020-jacinda-ardern-claims-biggest-labour-victory-in-50-years">stunning electoral victory</a>, she maintains the policy fundamentals put in place by the reforming Labour and National governments of the 1980s and 90s. </p>
<p>If that happens, the national narrative regarding home ownership will not be the only thing looking pretty tatty come 2023. The notions of Aotearoa being a <a href="https://www.stats.govt.nz/information-releases/child-poverty-statistics-year-ended-june-2019">great place to raise kids</a> and where everyone gets a fair go will increasingly also look like myths. </p>
<p>But Ardern might choose differently. She has the <a href="https://www.forbes.com/sites/nicolettejones/2020/12/08/from-kamala-harris-to-jacinda-ardern-the-worlds-most-powerful-women-in-politics-in-2020/?sh=2b395302450e">political influence</a> and smarts to permanently shift the way New Zealanders think about, engage in and experience the effects of politics for the better. </p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/with-house-prices-soaring-again-the-government-must-get-ahead-of-the-market-and-become-a-customer-of-first-resort-149446">With house prices soaring again the government must get ahead of the market and become a 'customer of first resort'</a>
</strong>
</em>
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<p>She also has the perfect opportunity to do this. Having been fed a thin gruel of individual responsibility for the past 35 years or so, most of us were reminded by the pandemic that altruism is important, context matters and “meritocracy” is often something certain people are born into and others aren’t. </p>
<p>Ardern has shown she can lead in crises — now we need her to show she can also harness what we learned during this tumultuous year and help rebuild the country many of us carry in our heads, but which in reality is rather less than that for too many New Zealanders.</p>
<p>For now, most of us can look forward to a summer without significant restrictions on our movement. That is no small thing, especially given what is <a href="https://www.nytimes.com/live/2020/12/09/world/covid-19-coronavirus">happening elsewhere</a>. But come 2021, and we move slowly into a post-pandemic world, we need the vision, political leadership and moral fortitude to ensure this country really is <a href="https://www.nytimes.com/2020/05/23/world/asia/jacinda-ardern-coronavirus-new-zealand.html">a team of five million</a>.</p><img src="https://counter.theconversation.com/content/151830/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Richard Shaw does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The pandemic delivered a political year like no other. The risk now is that the country returns to a ‘normal’ that wasn’t working to start with.Richard Shaw, Professor of Politics, Massey UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1494462020-11-08T19:05:47Z2020-11-08T19:05:47ZWith house prices soaring again the government must get ahead of the market and become a ‘customer of first resort’<p>House prices are <a href="https://www.rnz.co.nz/news/business/428297/surging-house-prices-can-t-last-forever-reinz">spiking again</a>, with “affordable homes” showing most growth. That’s no surprise really, with multiple factors in play.</p>
<p>Market instability due to COVID-19 is driving asset acquisition — property is the classic port in a storm for investors. Interest rates are at <a href="https://www.interest.co.nz/personal-finance/107126/economic-climate-has-brought-interest-rates-very-low-levels-and-environment">all-time lows</a> and likely to stay that way. The pandemic has curtailed people’s spending, costly holidays are cancelled, socialising is limited and home working has reduced travel costs.</p>
<p>Overall, homeowners have more disposable income. This has led to an uptick in home improvements, renovations and real estate activity. Media coverage adds fuel to the fire by breathlessly reporting rapid price rises. First-time buyers panic that they will miss their chance.</p>
<p>Bottom line: the conditions are in place for a house price boom.</p>
<p>Into this febrile atmosphere stepped the Property Investors’ Federation CEO, <a href="https://www.rnz.co.nz/news/national/429819/property-investors-federation-doubles-down-on-claim-first-home-buyers-contributing-to-housing-crisis">claiming</a> first-time buyers were causing recent price rises. The reasoning was that people moving out of a flat to buy a home — one that was previously a rental property — effectively reduce the available housing stock.</p>
<p>This is unfair at best. It shifts blame onto a younger, poorer demographic for reduced cost efficiency and return on investment. Those buyers may be looking to settle down and start a family. They are already largely locked out of the housing market by the depredations of property speculators and investors.</p>
<p><div data-react-class="Tweet" data-react-props="{"tweetId":"1323729844576792576"}"></div></p>
<h2>The rise of renting</h2>
<p>For many years, property investment has been the main way in which New Zealanders have grown their wealth and provided for retirement. Developing a property portfolio is a tax-efficient, cost-efficient option for individuals with surplus wealth.</p>
<p>Capital growth in previous acquisitions leverages funding for further acquisitions, making the process self-sustaining. Better yet, investors can congratulate themselves for offering rental accommodation options that the state does not provide.</p>
<p>Government attempts to limit investment through capital gains taxes or some other mechanism have encountered substantial <a href="https://www.stuff.co.nz/business/112010254/government-to-make-statement-on-capital-gains-tax">pushback</a>. New Zealanders want the freedom to invest in property.</p>
<p>The result has been an ever-increasing proportion of the population in rental accommodation and an accompanying decline in the total number of owner occupiers. Over the past 40 years, owner occupancy <a href="https://www.interest.co.nz/property/100565/statistics-nz-estimates-number-households-renting-their-homes-increased-15400-year">has declined</a> from 74% nationally to its current 62% (close to 50% in Auckland).</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/wellingtons-older-houses-dont-deserve-blanket-protection-but-6-storey-buildings-arent-always-the-answer-146302">Wellington’s older houses don’t deserve blanket protection — but 6-storey buildings aren’t always the answer</a>
</strong>
</em>
</p>
<hr>
<h2>The market alone won’t fix it</h2>
<p>House prices — irrespective of media narratives — are <a href="https://thepolicyobservatory.aut.ac.nz/__data/assets/pdf_file/0005/75083/168465_The-Mess-We-Are-In_Proof4_Digital_PRINT-VERSION-w-May.pdf">not driven by production costs</a>. They are driven by the residual values of existing houses. Like any commodity, scarcity drives values up. Abundance forces values down. Investors and first-time buyers pursuing the same properties create artificial scarcity.</p>
<p>The issue, then, is how to rapidly generate enough housing to meet the demand, given house building is not a rapid process. Irrespective of how many new houses of a particular type are wanted, capacity is constrained.</p>
<p>At best, additional “emergency” housing stock will take several years to be built. New houses are generally commissioned and bought by individual customers, and each house is unique and distinct. To date, most of this type of development has involved large, standalone — <a href="https://www.rnz.co.nz/national/programmes/ninetonoon/audio/201843832/are-the-wrong-kind-of-houses-being-built-in-auckland">not affordable</a> — homes.</p>
<p>This is not a market set up to provide mass housing at short notice. It is certainly not a market to create the housing surplus that would force down values.</p>
<h2>Governments should think like builders</h2>
<p>The options are clear — moderation of supply and demand, with houses constructed ahead of the market.</p>
<p>But successive governments have failed to recognise builders will not do this of their own accord. So-called “special housing areas” <a href="https://www.newsroom.co.nz/2018/08/26/207512/end-of-the-line-for-laxative-shas">failed</a> because the market <a href="https://www.lgnz.co.nz/news-and-media/2019-media-releases/lgnz-scrapping-shas-hamstrings-housing/">drove</a> the development of standalone sections, not high-density plots.</p>
<p>KiwiBuild, the previous government’s ambitious house-building policy, <a href="https://www.newsroom.co.nz/how-phil-twyford-lost-housing-and-kiwibuild-failed">failed utterly</a>. Once again, it was because the government assumed builders would scale up their production and productivity without pre-existing commitment of funding and contracts. </p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/new-zealand-will-make-big-banks-insurers-and-firms-disclose-their-climate-risk-its-time-other-countries-did-too-146392">New Zealand will make big banks, insurers and firms disclose their climate risk. It's time other countries did too</a>
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</em>
</p>
<hr>
<p>Starting large development contracts without guaranteed customers is risky. Builders have limited resources and will not take on speculative builds.</p>
<p>On the other hand, housing scarcity leads to regular business and reasonable margins. In a volatile economy this is a good place to be. In a free society we can’t simply compel builders to build more. We can only encourage and incentivise them with large contracts.</p>
<p>This is where the government would need to provide the development capital to get ahead of the market — in other words, be the customer of first resort.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/the-housing-boom-propelled-inequality-but-a-coronavirus-housing-bust-will-skyrocket-it-139039">The housing boom propelled inequality, but a coronavirus housing bust will skyrocket it</a>
</strong>
</em>
</p>
<hr>
<h2>Reining in property investors</h2>
<p>This does create the secondary problem of the state stepping into a commercial space. Using public funds to favour certain projects and providers will certainly trigger outraged howls of “unfair competition” from those not favoured.</p>
<p>But the demand side could be dampened with various measures to limit property investors and meet the urgent need to wean New Zealanders off property investment by:</p>
<ul>
<li><p>limiting the number of properties that individuals or household trusts can hold</p></li>
<li><p>limiting the number of trusts that individuals can hold</p></li>
<li><p>incentivising divestment of property holdings (in favour of selling to first-home buyers, for example).</p></li>
</ul>
<p>The elephant in the room is a capital gains tax on secondary and rental properties — something the current government backed away from during its first term.</p>
<p>Ultimately, though, given a choice between helping first-home buyers into housing or limiting cost-effective property investment, a left-leaning government will likely side with social need over optimising capital formation. To do otherwise would be unacceptable to its voter base.</p>
<p>In the final analysis, the Property Investors’ Federation is likely to be sorely disappointed with future policy.</p><img src="https://counter.theconversation.com/content/149446/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>John Tookey does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>New Zealand’s housing market is ill designed to create the surpluses that would force down values. Only the state can change that.John Tookey, Professor of Construction Management, Auckland University of TechnologyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1302912020-02-16T18:56:24Z2020-02-16T18:56:24ZAustralia’s housing system needs a big shake-up: here’s how we can crack this<p>Despite two years of <a href="https://theconversation.com/vital-signs-we-are-witnessing-a-slowly-deflating-property-bubble-for-now-98624">housing market cooling</a> in Sydney and Melbourne, Australia stayed <a href="http://demographia.com/dhi.pdf">near the top</a> of the global unaffordability league in 2019. And with <a href="https://www.domain.com.au/news/australias-median-house-rising-back-towards-peak-prices-as-key-market-rebound-922435/">prices rebounding</a> in our two largest cities, that status is likely to be reinforced in 2020. Australia’s 30-year housing affordability decline has been among the worst in the developed world.</p>
<p>This problem is <a href="https://www.tandfonline.com/doi/full/10.1080/02673037.2011.616994">fundamentally structural</a> – not cyclical – in nature. Yes, periodic turbulence affects prices and rents. And yes, market conditions vary greatly from place to place. Australia-wide, though, there is an underlying dynamic that – over the medium to long term – is driving housing affordability and rental stress in one general direction only: for the worse.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/informal-and-illegal-housing-on-the-rise-as-our-cities-fail-to-offer-affordable-places-to-live-116065">Informal and illegal housing on the rise as our cities fail to offer affordable places to live</a>
</strong>
</em>
</p>
<hr>
<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/315152/original/file-20200213-41678-12hohlt.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/315152/original/file-20200213-41678-12hohlt.png?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/315152/original/file-20200213-41678-12hohlt.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=850&fit=crop&dpr=1 600w, https://images.theconversation.com/files/315152/original/file-20200213-41678-12hohlt.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=850&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/315152/original/file-20200213-41678-12hohlt.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=850&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/315152/original/file-20200213-41678-12hohlt.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=1068&fit=crop&dpr=1 754w, https://images.theconversation.com/files/315152/original/file-20200213-41678-12hohlt.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=1068&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/315152/original/file-20200213-41678-12hohlt.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=1068&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
<span class="attribution"><a class="source" href="https://www.palgrave.com/gp/book/9789811507793">Palgrave Macmillan</a></span>
</figcaption>
</figure>
<p>Certain key factors in Australian housing woes are, of course, far from unique. As we argue in <a href="https://www.palgrave.com/gp/book/9789811507793">our new book</a>, neoliberal policy dominance and the <a href="https://theconversation.com/explainer-the-financialisation-of-housing-and-what-can-be-done-about-it-73767">financialisation of housing</a> have damaged housing system performance in <a href="https://theconversation.com/housing-policy-reset-is-overdue-and-not-only-in-australia-112835">many other countries</a> as well. Similarly, cheap debt has supercharged house prices globally, not just here. And ours is not the only comparable nation where coping with rapid population growth is part of the policy challenge.</p>
<p>But, as we show in our book, over the past 30 years across 18 OECD countries, our market has had the third-biggest fall in house price affordability – and the largest of any major OECD nation.</p>
<p>In Australia, the focus of concern is often on the <a href="https://theconversation.com/first-home-buyer-schemes-arent-enough-to-meet-young-adults-housing-aspirations-121431">challenges aspiring first-home buyers face</a>. Although important, this shouldn’t distract policymakers from the bigger policy problem: <a href="https://theconversation.com/private-renters-are-doing-it-tough-in-outer-suburbs-of-sydney-and-melbourne-120427">affordability stress affecting lower-income renters</a>. </p>
<p>Being pushed into poverty by high rents is a serious issue. It affects <a href="https://www.palgrave.com/gp/book/9789811507793">well over a million Australians</a>. That’s many more than the <a href="https://theconversation.com/small-but-well-formed-the-new-home-deposit-scheme-will-help-and-its-unlikely-to-push-up-prices-117073">marginal first-home-buyer cohort</a>.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/315157/original/file-20200213-41683-5tfu2t.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/315157/original/file-20200213-41683-5tfu2t.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/315157/original/file-20200213-41683-5tfu2t.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=266&fit=crop&dpr=1 600w, https://images.theconversation.com/files/315157/original/file-20200213-41683-5tfu2t.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=266&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/315157/original/file-20200213-41683-5tfu2t.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=266&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/315157/original/file-20200213-41683-5tfu2t.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=334&fit=crop&dpr=1 754w, https://images.theconversation.com/files/315157/original/file-20200213-41683-5tfu2t.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=334&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/315157/original/file-20200213-41683-5tfu2t.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=334&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
<span class="attribution"><a class="source" href="https://theconversation.com/private-renters-are-doing-it-tough-in-outer-suburbs-of-sydney-and-melbourne-120427">Source: Private renters are doing it tough in outer suburbs of Sydney and Melbourne/The Conversation</a></span>
</figcaption>
</figure>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/growing-numbers-of-renters-are-trapped-for-years-in-homes-they-cant-afford-125216">Growing numbers of renters are trapped for years in homes they can't afford</a>
</strong>
</em>
</p>
<hr>
<h2>Systemic problems have very broad impacts</h2>
<p>Financial regulators and policymakers are starting to realise housing system under-performance doesn’t just <a href="https://theconversation.com/is-this-a-housing-system-that-cares-thats-the-question-for-australians-and-their-new-government-117311">damage the welfare</a> of key population groups. It also <a href="https://theconversation.com/is-social-housing-essential-infrastructure-how-we-think-about-it-does-matter-110777">raises concerns about economic productivity</a> and <a href="https://theconversation.com/four-ways-an-australian-housing-bubble-could-burst-76505">systemic financial risk</a>. </p>
<p>Even from a narrow “cost to government” perspective, the Australian government should treat current housing system trends as a serious budgetary concern because of impacts on future public spending.</p>
<p>For example, <a href="https://theconversation.com/retiree-home-ownership-is-about-to-plummet-soon-little-more-than-half-will-own-where-they-live-115255">declining home ownership</a> among younger and middle age groups will filter through to older age groups over time. Increasing numbers of older, <a href="https://theconversation.com/private-renters-are-doing-it-tough-in-outer-suburbs-of-sydney-and-melbourne-120427">lower-income, private renters</a> will <a href="https://www.aist.asn.au/Media-and-News/News/">generate political pressure</a> to boost <a href="https://www.servicesaustralia.gov.au/individuals/services/centrelink/rent-assistance">Rent Assistance</a> and the <a href="https://www.servicesaustralia.gov.au/individuals/services/centrelink/age-pension">Age Pension</a>. And <a href="https://www.aist.asn.au/Media-and-News/News/">pensioner numbers will be inflated</a> if rising numbers of home owners who reach retirement age with mortgages draw on superannuation savings to pay off their debt.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/296993/original/file-20191015-98661-b2ne0v.PNG?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/296993/original/file-20191015-98661-b2ne0v.PNG?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/296993/original/file-20191015-98661-b2ne0v.PNG?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=261&fit=crop&dpr=1 600w, https://images.theconversation.com/files/296993/original/file-20191015-98661-b2ne0v.PNG?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=261&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/296993/original/file-20191015-98661-b2ne0v.PNG?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=261&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/296993/original/file-20191015-98661-b2ne0v.PNG?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=327&fit=crop&dpr=1 754w, https://images.theconversation.com/files/296993/original/file-20191015-98661-b2ne0v.PNG?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=327&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/296993/original/file-20191015-98661-b2ne0v.PNG?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=327&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">The number of private renters has grown as the proportions of owner occupiers and public housing tenants have fallen.</span>
<span class="attribution"><a class="source" href="https://www.pc.gov.au/research/completed/renters/private-renters.pdf">Vulnerable Private Renters: Evidence and Options, Productivity Commission</a>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span>
</figcaption>
</figure>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/fall-in-ageing-australians-home-ownership-rates-looms-as-seismic-shock-for-housing-policy-120651">Fall in ageing Australians' home-ownership rates looms as seismic shock for housing policy</a>
</strong>
</em>
</p>
<hr>
<h2>Why do we need system-wide change?</h2>
<p>As we argue in our book, housing policy needs to be much more broadly conceived. It’s about much more than “housing programs”. Indeed, housing outcomes in Australia over the past 25 years have been driven far more by policy on tax, finance and regulation – activities rarely controlled by any department with housing in its title – than by explicit spending on housing or subsidies.</p>
<p>Because housing is a system, any serious attempt to improve housing outcomes must recognise the need for system-wide analysis and transformation. </p>
<p>Micro-measures have been the <a href="https://www.tandfonline.com/doi/abs/10.1080/02673037.2015.1044948">preferred approach</a> of most Australian governments over the past 25 years. But these often generate minimal net benefit or are <a href="https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&cad=rja&uact=8&ved=2ahUKEwjKi9vC2qLnAhXyjOYKHXvSDhYQFjAAegQIAxAB&url=https%3A%2F%2Fwww.aph.gov.au%2FDocumentStore.ashx%3Fid%3D99cfa3f6-858f-467d-91a9-31e384534a5e%26subId%3D31798&usg=AOvVaw3nBV95LNjlwdZiDyeAp7tN">even counterproductive</a>.</p>
<p>A national housing strategy is long overdue. And only the Commonwealth can lead this. The Commonwealth and its agencies – not the states – control key instruments driving housing outcomes, especially tax and social security settings, as well as financial regulation.</p>
<p>As national governments recognised in the early 1990s and from 2007-10 – and indeed exemplified by the Turnbull government’s 2018 <a href="https://theconversation.com/government-guarantee-opens-investment-highway-to-affordable-housing-88549">National Housing Finance and Investment Corporation</a> – the constitutional designation of state and territory responsibility for housing and planning is no bar to this.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/how-1-bright-light-in-a-bleak-social-housing-policy-landscape-could-shine-more-brightly-126922">How 1 bright light in a bleak social housing policy landscape could shine more brightly</a>
</strong>
</em>
</p>
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<h2>What are the priorities for a national strategy?</h2>
<p>A key goal must be to discourage speculation in land and housing. This would include a phased restructure of tax settings that incentivise unproductive housing over investment. For example, <a href="https://grattan.edu.au/wp-content/uploads/2018/03/901-Housing-affordability.pdf">most housing economists agree</a> investor landlord tax concessions should be wound back and a <a href="https://www.theage.com.au/politics/federal/it-s-just-a-bad-tax-former-treasury-heads-unite-to-slam-stamp-duty-20200216-p541aq.html">broad-based land tax should gradually replace stamp duty</a> on housing sales.</p>
<p>The strategy must also aim to increase diversity in the housing market. Expanding the scale of government and non-profit housing provider activity can boost the capacity to better house disadvantaged groups. It will also <a href="https://theconversation.com/build-social-and-affordable-housing-to-get-us-off-the-boom-and-bust-roller-coaster-113113">reduce vulnerability to damaging market volatility</a> arising from the overwhelming reliance on for-profit developers building for individual buyers.</p>
<p>To repair the hollowing-out of housing policy-making capability within governments, the plan should include institutional reform and capacity-building. Both levels of government should have a dedicated cabinet-level housing minister to champion the housing cause across departments. We also need an enduring national agency like the US Department of Housing and Urban Development or the former UK Housing Corporation.</p>
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Read more:
<a href="https://theconversation.com/housing-policy-reset-is-overdue-and-not-only-in-australia-112835">Housing policy reset is overdue, and not only in Australia</a>
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<h2>Start small and build up to far-reaching action</h2>
<p>Our insistence on system-wide analysis and reform might seem utopian, especially given the current state of Australian politics. There are parallels here to the challenges of climate change: many might ask how much worse things have to get before active policy action becomes irresistible as a bipartisan commitment.</p>
<p>In the absence of immediate system-wide action on housing, <a href="https://www.palgrave.com/gp/book/9789811507793">we can also point</a> to initial reforms that Australian governments could easily adopt with minimal direct budgetary impact.</p>
<p>State and territory governments could, for example, follow many comparable countries in adopting planning system <a href="https://theconversation.com/england-expects-40-of-new-housing-developments-will-be-affordable-why-cant-australia-94581">rules that set minimum levels of affordable housing</a> that must be built within market housing developments. </p>
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Read more:
<a href="https://theconversation.com/six-lessons-on-how-to-make-affordable-housing-funding-work-across-australia-91072">Six lessons on how to make affordable housing funding work across Australia</a>
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<p>In the realm of tenants’ rights, other states could <a href="https://www.tenantsvic.org.au/media/media-releases/rental_fairness_package_oct2017/">follow Victoria</a> in <a href="https://theconversation.com/an-open-letter-on-rental-housing-reform-103825">rebalancing residential tenancy laws</a> away from their typically in-built landlord advantage. “No grounds evictions” should be outlawed.</p>
<p>The Commonwealth could restore the pre-1996 rules of its longstanding <a href="https://theconversation.com/the-new-national-housing-agreement-wont-achieve-its-goals-without-enough-funding-99936">National Housing Agreement</a> with the states and territories which largely ringfenced federal funding to supply and improve social housing. All governments could commit to delivering a substantial proportion of affordable housing within residential developments on ex-government land. Many industry stakeholders advocate a <a href="https://www.domain.com.au/news/calls-for-higher-affordable-housing-targets-as-more-people-on-cusp-of-poverty-20170802-gxo11s/">30% target</a>.</p>
<p>We see scope for a phased approach: first-step measures could be implemented while building the political consensus needed for more far-reaching actions. To improve affordability and moderate the <a href="https://theconversation.com/how-the-housing-boom-is-remaking-australias-social-class-structure-66976">rising inequities within</a> and <a href="https://theconversation.com/for-the-first-time-in-a-long-time-were-setting-up-a-generation-to-be-worse-off-than-the-one-before-it-121983">between generations</a>, Australia’s housing system must be fundamentally reformed. There is no responsible “business as usual” option.</p>
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Read more:
<a href="https://theconversation.com/rising-inequality-in-australia-isnt-about-incomes-its-almost-all-about-housing-119872">Rising inequality in Australia isn't about incomes: it's almost all about housing</a>
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<p><em><a href="https://www.palgrave.com/gp/book/9789811507793">Housing Policy in Australia: A case for system reform</a> by Hal Pawson, Vivienne Milligan and Judith Yates was published by Palgrave Macmillan this month.</em></p><img src="https://counter.theconversation.com/content/130291/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Hal Pawson receives funding from the Australian Research Council, the Australian Housing and Urban Research Institute and Crisis UK</span></em></p><p class="fine-print"><em><span>Judith Yates has previously received funding from the Australian Housing and Urban Research Institute and from the Australian Research Council. </span></em></p><p class="fine-print"><em><span>Vivienne Milligan has previously received funding from the Australian Housing and Urban Research institute and various government departments. </span></em></p>Millions of Australians are struggling with unaffordable housing. It’s a systemic problem that’s been decades in the making, and only concerted system-wide reforms will fix it.Hal Pawson, Professor of Housing Research and Policy, and Associate Director, City Futures Research Centre, UNSW SydneyJudith Yates, Honorary Associate Professor, School of Economics, University of SydneyVivienne Milligan, Honorary Professor – Housing Policy and Practice, City Futures Research Centre, UNSW SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1167362019-05-08T03:58:29Z2019-05-08T03:58:29ZConfirmation from NSW Treasury. Labor’s negative gearing policy would barely move house prices<figure><img src="https://images.theconversation.com/files/273222/original/file-20190508-183093-1c05hvc.jpg?ixlib=rb-1.1.0&rect=95%2C395%2C3898%2C2167&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">A drop in prices of 0.5% is no drop at all.</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>The pushback against federal Labor’s reforms to negative gearing is ramping up again with the release of <a href="https://www.theaustralian.com.au/business/property/nsw-warning-on-house-price-stamp-duty-falls-if-labor-pushes-through-negative-gearing-policy/news-story/77e9201eee91aeac831812d647536e5f?nk=acc048a87489709af32fab40a1e4fa75-1557268010">NSW Treasury modelling</a>.</p>
<p>The modelling predicts that Labor’s changes to negative gearing and the capital gains tax discount would cause a 0.8% to 1.3% decline in stamp duty revenues in the three years to 2022-23, or A$200 million over three years, assuming Labor’s policies take effect from January 1, 2020.</p>
<p>But behind the headline is the punchline: NSW Treasury is predicting house prices would barely move. Housing turnover would also fall, but only by between 0.3% and 1%. Since stamp duty revenues depend on (a) property sales; and (b) the prices at which they’re transacted, these figures mean that house prices fall marginally at most. They’d be just 0.5% lower than otherwise by the end of 2019, and around 1% lower over the three years.</p>
<h2>Consistent with Grattan modelling</h2>
<p>These declines in prices is pretty consistent with Grattan Institute’s own <a href="https://grattaedu.au/report/hot-property/">research</a>, which estimated that abolishing negative gearing would lead to house price falls in the range of 1% to 2%, assuming the value of the A$6.6 trillion property market falls by the entire value of the future stream of tax benefits.</p>
<p>Keep in mind that house prices in Sydney and Melbourne have already <a href="https://www.news.com.au/finance/economy/australian-economy/house-prices-notch-worst-annual-fall-since-gfc/news-story/b654a045a63553d6c97738943195e209">fallen</a> by more than 10%, punching a much larger hole in stamp duty revenues than that modelled by NSW Treasury as a result of reforms to negative gearing and the capital gains tax discount.</p>
<p>Arguably, the impacts of reforms to the CGT and negative gearing on the housing market would be even smaller today, because many investors are sitting on the sidelines after the recent house price falls and changes to macro-prudential rules. </p>
<h2>It would raise money…</h2>
<p>Labor’s reforms to negative gearing and the capital gains tax discount would substantially boost the budget bottom line. The independent Parliamentary Budget Office estimates Labor’s policies would raise about A$32.1 billion over ten years.</p>
<p>Winding back these tax concessions would enable the government to reduce other taxes, provide more services, improve the budget bottom line, or provide additional grants to the states (such as for hospitals) much greater than the A$200 million over three years that the NSW Treasury might lose.</p>
<p>The negative gearing change could increase rents, but only if it reduced the supply of new housing. With <a href="https://grattan.edu.au/wp-content/uploads/2018/07/ACE-2018-Supply-sceptics-beware-11-July-2018-media-version.pdf">tight constraints</a> on the supply of land suitable for urban housing, most of the impact would be felt via lower land prices. And any effects would be small: most investment lending is for existing housing, and Labor’s policy leaves in place negative gearing tax write-offs for new homes.</p>
<h2>…and stabilise the economy</h2>
<p>The policy would also <a href="https://www.smh.com.au/politics/federal/negative-gearing-changes-will-affect-us-all-mostly-for-the-better-20190208-p50wjn.html">promote financial stability</a> by encouraging investors to chase rental yields rather than capital gains. The Reserve Bank, the Productivity Commission and the Murray financial system inquiry all raised concerns about the effects of the current tax arrangements on financial stability.</p>
<p>The policy would also promote an increase in home ownership. Fewer investors bidding at auctions would mean more homebuyers moving in.</p>
<p>Such small falls in house prices, as the NSW Treasury predicts, seems a modest price to pay for these benefits. Most Australians would probably take such a deal.</p>
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Read more:
<a href="https://theconversation.com/the-game-of-homes-how-the-vested-interests-lie-about-negative-gearing-112222">The Game of Homes: how the vested interests lie about negative gearing</a>
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<img src="https://counter.theconversation.com/content/116736/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The Grattan Institute began with contributions to its endowment of $15 million from each of the Federal and Victorian Governments, $4 million from BHP Billiton, and $1 million from NAB. In order to safeguard its independence, Grattan Institute’s board controls this endowment. The funds are invested and contribute to funding Grattan Institute's activities. Grattan Institute also receives funding from corporates, foundations, and individuals to support its general activities as disclosed on its website.
</span></em></p>Houses will be worth more or less what they would have been, if Labor’s policies are adopted, NSW Treasury analysis says.Brendan Coates, Fellow, Grattan InstituteLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1165902019-05-06T20:08:54Z2019-05-06T20:08:54ZOn rate-cut Tuesday, here are four reasons why the Reserve Bank shouldn’t jump<figure><img src="https://images.theconversation.com/files/272897/original/file-20190506-103045-1685i4p.jpg?ixlib=rb-1.1.0&rect=634%2C323%2C3011%2C1568&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">On the first Tuesday of every month but one the Reserve Bank has to make a decision. This time the inflation rate is zero.</span> <span class="attribution"><span class="source">Shutterstock/RBA</span></span></figcaption></figure><p>Every first Tuesday of every month but January the Reserve Bank Board meets to decide whether to adjust interest rates. It announces its decision at <a href="https://www.rba.gov.au">2.30 pm eastern time</a>.</p>
<p>It ought to be an easy decision. Officially, the bank aims for a target inflation rate of between 2% and 3% “on average over the cycle.” </p>
<p>It’s has been the way the Reserve Bank Act has been interpreted since the early 1990s, with the view being that keeping inflation low is the best way it can support sustainable economic growth.</p>
<p>With inflation now showing <a href="https://theconversation.com/vital-signs-zero-inflation-means-the-reserve-bank-should-cut-rates-as-soon-as-it-can-on-tuesday-week-115931">no overall price rise</a> (0%) over the first three months of this year and only 1.3% over the past twelve months, it would seem incumbent upon the bank to cut rates - now - to get inflation back up.</p>
<p>But, for what it’s worth, here are the reasons I think it shouldn’t, at least not now.</p>
<h2>Rate cuts don’t do what they did</h2>
<p>First, interest rate cuts normally do their work by encouraging people to spend, which then feeds through intro price rises. However, it has long been understood by economists that at very low rates, further interest rate cuts may have only limited effects. With household debt already high, it is doubtful that a further cut will encourage people to borrow even more in order to spend more.</p>
<p>Of course another reason not to cut rates is the fact that an election will take place in 11 days time. It’s a difficult one for the bank. It quite rightly wants to be seen as independent. Cutting rates ahead of an election runs the risk of making it look as if it is trying to help the government, although ironically, at the moment a rate cut might help the opposition by putting beyond doubt its argument that the economy is weak.</p>
<p>All in all I think it would be better for the bank to wait a month until after the election, given that the need for a cut isn’t urgent.</p>
<h2>House prices are still too high</h2>
<p>A third reason not to cut rates is that the rate cuts we have had have distorted asset prices. House prices might have fallen, but the prices are still well above levels that would prevail if interest rates were normal. To cut rates now risks reigniting house prices. </p>
<p>The main reason why I think we shouldn’t have a rate cut is that we rely much too heavily on monetary policy (which is interest rates). </p>
<p>The main reason wage and economic growth is low because productivity growth is low. Lower interest rates will do little to lift it. The policies that might lift it have been few and far apart in the election campaign, but it is what we need, and it is difficult. The <a href="https://www.pc.gov.au/inquiries/completed/productivity-review/report">Productivity Commission</a> came up with a list in the first of its five-yearly productivity reviews. It’s key points were better health care, a better education system, taxes on unused land, better planning, and a properly functioning energy market and industrial relations system.</p>
<h2>There are better ways to lift incomes</h2>
<p>Instead, we run to the monetary policy teat at the first sign of economic weakness because it is easy and comfortable and has delivered before.</p>
<p>It is time also to reassess the Reserve Bank’s 2-3% inflation target. Weak consumer demand, demographic change and global competition might have created a new normal, meaning a target of 1-3% or even 0-3% might be more realistic. </p>
<p>Economists tend to dislike a zero inflation target because of the risk of missing and bringing on deflation, but inflation volatility has been low enough in recent years to make 1-3% target pretty safe and to stop us running to the bank each time things look weak. </p>
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Read more:
<a href="https://theconversation.com/vital-signs-zero-inflation-means-the-reserve-bank-should-cut-rates-as-soon-as-it-can-on-tuesday-week-115931">Vital signs. Zero inflation means the Reserve Bank should cut rates as soon as it can, on Tuesday week</a>
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<img src="https://counter.theconversation.com/content/116590/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Mark Crosby does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Interest rate cuts don’t work like they used to, and they help us put off the hard things we need to do to improve our lives.Mark Crosby, Professor, Monash UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1141752019-04-23T20:16:46Z2019-04-23T20:16:46ZHouse prices and demographics make death duties an idea whose time has come<figure><img src="https://images.theconversation.com/files/270413/original/file-20190423-175514-ulcc95.jpg?ixlib=rb-1.1.0&rect=764%2C1351%2C2905%2C1809&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">$3.5 trillion is about to be poured into a small number of hands over the next two decades.</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>Suddenly, death duties are part of the election campaign. </p>
<p>Not that Labor (or the Coalition) is proposing them, but photoshopped fake tweets from Labor figures saying they will introduce them <a href="https://twitter.com/Gary_Hardgrave/status/1120140542472384512">have been doing the rounds</a>, and the Coalition is using the suggestion it its advertising, parading around trucks on whose side is printed: “<a href="https://www.canberratimes.com.au/story/6086351/canberra-liberals-defend-billboard/?cs=14350">Labor will tax you to death</a>”. </p>
<p>At the risk of entering the political (non) debate, its worth drawing attention to a substantial consensus among economists that they are <a href="https://www.economist.com/leaders/2017/11/23/a-hated-tax-but-a-fair-one">something we need</a>.</p>
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<h2>What are death duties?</h2>
<p>Death duties (more formally known as inheritance taxes) are levied on the estates of dead people above a predefined tax-free threshold, prior to their distribution to the beneficiaries. </p>
<p>They have a long pedigree, being currently administered in 19 developed countries. The average rate among members of the Organisation of Economic Co-operation and Development is 15% but rates vary from 4% in Italy to 55% in Japan. </p>
<p>We had them in Australia until the late 1970’s, administered by both the Commonwealth and state governments. However in both cases the taxes were <a href="https://aibe.uq.edu.au/files/1922/AIBE_Inheritance_Tax_Paper.pdf">distinguished by the ease with which they could be avoided</a>.</p>
<h2>Without them, our rich will get richer</h2>
<p>Since death duties went, Australian income inequality has climbed, with the standard measure (known as the Gini coefficient) climbing from <a href="http://www.abs.gov.au/ausstats/abs@.nsf/mf/6523.0">0.27 to 0.32</a> between 1982 and 2016 on a scale where a result of zero would mean income was equally shared and a result of 1 would mean one person earned all the income.</p>
<p>It’s harder to tell what’s happening to the distribution of wealth. The figures don’t go back as far, and the global financial crisis disrupted what appears to have been a long term trend for the distribution to become less equal. The Gini coefficient for the distribution of wealth is 0.52, much worse than in is for the distribution of income. </p>
<p>The removal of death duties is far from the only potential reason. </p>
<p>Others include:</p>
<ul>
<li><p>Demographics. More Australians are older and they are more likely than younger people to own homes whose values have shot up in two waves around the turn of this century and the middle of the 2010s. Almost 90% of the gain in wealth in the past 20 years has been in households headed by someone over 45 years.</p></li>
<li><p>Income growth. Wage growth has slumped during the past decade, leaving higher housing, sharemarket and other asset prices <a href="https://www.rba.gov.au/publications/workshops/research/2017/pdf/rba-workshop-2017-stephen-machin.pdf">as the chief form of wealth growth</a>.</p></li>
</ul>
<p>Untaxed inheritance is likely to matter more. Over the next 20 years about 13% of Australia’s current population is expected to reach its life expectancy, meaning 3.18 million people are likely to die. Their net worth accounts for 27% to 37% of Australia’s total wealth.</p>
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Read more:
<a href="https://theconversation.com/why-we-should-put-an-inheritance-tax-back-into-the-spotlight-1634">Why we should put an inheritance tax back into the spotlight</a>
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<p>A study by financial planning experts at Griffith University estimates that over the next 20 years Australians over 60 will transfer A$3.5 trillion in wealth, worth about <a href="https://www.nomorepractice.com.au/wp-content/uploads/2017/09/FINAL-Gen-XY-Intergeneratonal-Wealth-Transfer-v7.pdf">$320,000 on average to each recipient</a>. </p>
<p>Around four fifths of that wealth will go to the top one fifth of recipients, pushing the Gini wealth inequality coefficient considerably higher. </p>
<p>It’s a concern because societies with bigger inequalities <a href="https://news.harvard.edu/gazette/story/2016/02/the-costs-of-inequality-increasingly-its-the-rich-and-the-rest/">have bigger social and economic problems</a>.</p>
<h2>They are better than the alternatives</h2>
<p>Death duties meet most of the basic conditions for a good tax. </p>
<p>They are fair (in that they treat people in the same situation the same and take more from those who have than those who do not) and they are easy to understand.</p>
<p>Their big advantage over ordinary income tax is that they distort economic activity less: because they are levied on unearned rather than earned income they are unlikely to prod people into earning less.</p>
<p>The Economist magazine puts it this way:</p>
<blockquote>
<p>Unlike income taxes, they do not destroy the incentive to work; whereas research suggests that a single person who inherits an amount above $150,000 is four times more likely to leave the labour force than one who inherits less than $25,000. Unlike capital-gains taxes, heavier estate taxes do not seem to dissuade saving or investment. Unlike sales taxes, they are progressive. To the extent that a higher inheritance tax can fund cuts to all other taxes, the system can be more efficient.</p>
</blockquote>
<p>They are points made a century earlier by US President Theodore Roosevelt <a href="https://www.infoplease.com/homework-help/us-documents/state-union-address-theodore-roosevelt-december-3-1907">who told Congress</a></p>
<blockquote>
<p>No advantage comes either to the country as a whole or to the individuals inheriting the money by permitting the transmission in their entirety of the enormous fortunes which would be affected by such a tax</p>
</blockquote>
<h2>Yet they’re not yet popular</h2>
<p>Inheritance taxes pit two widely held views against one another. </p>
<p>One is that governments should leave people to dispose of their wealth as they see fit. </p>
<p>The other is that a permanent, hereditary elite makes a society unhealthy (as well as unfair). The sons and daughters of people who built great companies are not necessarily the best people to run them.</p>
<p>Getting them reintroduced isn’t that unlikely. </p>
<p>The 2010 Henry Tax Review supported them. Noting that what it called a “bequests tax” would help Australia <a href="http://taxreview.treasury.gov.au/content/Content.aspx?doc=html/pubs_reports.htm">navigate its demographic changes</a>, it said</p>
<blockquote>
<p>Over the next 20 years, the proportion of all household wealth held by older Australians is projected to increase substantially. Large asset accumulations will be passed on to a relatively small number of recipients. </p>
</blockquote>
<p>However it also noted that </p>
<blockquote>
<p>There would be a need for anti-avoidance provisions, including a tax on gifts. There would, inevitably, be significant administration and compliance costs. A tax on bequests should not be levied at very high rates. People should not be unduly deterred from saving to leave bequests. A substantial tax-free threshold combined with a low flat rate beyond that point would be an appropriate structure for a bequest tax. Bequests to spouses should be concessionally treated. </p>
</blockquote>
<p>The 2015 Treasury tax discussion paper presented to treasurer Joe Hockey also canvassed the idea, although it noted that “<a href="https://treasury.gov.au/sites/default/files/2019-03/c2015-rethink-dp-TWP_combined-online.pdf">such taxes can be difficult to administer effectively</a>”.</p>
<p>More recently, on taking on the job of treasurer under prime minister Malcolm Turnbull, Scott Morrision <a href="https://www.smh.com.au/politics/federal/turnbull-government-refuses-to-rule-out-return-of-death-duties-20151114-gkywn9.html">refused to rule them out</a> amid calls for a tax targeting bequests of more than $2 million. </p>
<p>The best chance of bringing an inheritance tax back would be to link to something socially worthwhile such as housing affordability, education or relief from other taxes. Ordinary bequests beneath a high threshold would be exempted, and the threshold would be indexed (it wasn’t, when Australia last had death duties, meaning that over time they became more intrusive and unpopular). Exemptions could be considered for husbands and wives and perhaps for family farms.</p>
<p>It most likely wouldn’t be a big revenue raiser, but it would make an important point: that wealth is worth taxing (at least on death) in addition to income and spending. Taxing wealth in its own right is no more double taxing than is tax on income and expenditure. And if we can do a bit to redistribute the avalanche of wealth about to hit the best off 20 per cent of beneficiaries, it would be no bad thing for the maintenance of what by international standards is still a relatively equal society.</p><img src="https://counter.theconversation.com/content/114175/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>John Mangan does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Four fifths of the coming bonanza of bequests are set to go to the top one fifth of recipients.John Mangan, Professor and Director of the Australian Institute For Business and Economics, The University of QueenslandLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1112672019-02-19T19:10:29Z2019-02-19T19:10:29ZWhy falling house prices do less to improve affordability than you might think<p>Housing prices are falling in Sydney and Melbourne, so housing must be becoming more affordable – right? </p>
<p>The annual growth of house prices has been <a href="http://www.abs.gov.au/ausstats/abs@.nsf/mf/6416.0">slowing consistently for more than a year</a> in Australia’s largest cities. Prices finally started falling in the latter part of last year. The decline began much earlier in Perth and Darwin. Prices in most other cities, with the exception of Hobart, have been more stable.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/259652/original/file-20190219-121732-1kgsc08.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/259652/original/file-20190219-121732-1kgsc08.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/259652/original/file-20190219-121732-1kgsc08.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=430&fit=crop&dpr=1 600w, https://images.theconversation.com/files/259652/original/file-20190219-121732-1kgsc08.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=430&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/259652/original/file-20190219-121732-1kgsc08.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=430&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/259652/original/file-20190219-121732-1kgsc08.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=541&fit=crop&dpr=1 754w, https://images.theconversation.com/files/259652/original/file-20190219-121732-1kgsc08.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=541&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/259652/original/file-20190219-121732-1kgsc08.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=541&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Melbourne and Sydney have had sharp falls in house prices, but the declines started much earlier in Perth and Darwin.</span>
<span class="attribution"><a class="source" href="http://www.abs.gov.au/AUSSTATS/abs@.nsf/DetailsPage/6416.0Sep%202018?OpenDocument">ABS</a>, <span class="license">Author provided</span></span>
</figcaption>
</figure>
<h2>House owners have a secret weapon</h2>
<p>A rise in house prices is a mixed blessing. For those whose employment and savings strategies have helped them become home owners, price inflation is a good thing – the value of the house rises while the mortgage debt stays the same, or falls. For others, the savings and income targets for owning a home become ever more elusive. </p>
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Read more:
<a href="https://theconversation.com/head-start-for-home-owners-makes-a-big-difference-for-housing-stress-109007">Head start for home owners makes a big difference for housing stress</a>
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<p>So this should mean falling house prices are bad for home owners and good for aspiring home owners, right? In practice, things don’t work out quite like this, for several reasons.</p>
<p>Provided they are financially “liquid” (they have a job and can cope financially), home owners have a secret weapon: they don’t have to sell. </p>
<p><a href="https://www.ahuri.edu.au/research/final-reports/287">Research</a> shows housing markets tend to operate in periods of “frenzy” alternating with periods of relative inactivity. Lots of people try to capitalise and trade up in a hot market. Once markets cool, people tend to stay where they are and wait for prices to improve. </p>
<p>For aspiring home owners, this is bad news. Although prices might be falling, fewer people are vacating their houses. This reduces the supply of houses on the market at lower prices.</p>
<h2>Weaker markets make loans harder to get</h2>
<p>House markets adjust to economic cycles, although these adjustments tend to be exaggerated and are prone to overshooting. The global financial crisis is an obvious example of an extreme correction when asset values plummeted.</p>
<p>The current dip in house prices in Australia is almost certainly a milder adjustment. However, even minor adjustments in the housing market are associated with adjustments elsewhere in the economy, particularly in labour markets. </p>
<p>The graph below shows the national trends in employment and <a href="http://www.abs.gov.au/ausstats/abs@.nsf/products/036166B5C6D48AF2CA256BD00027A857?OpenDocument">underemployment</a> over the past three years. Although <a href="http://www.abs.gov.au/ausstats/abs@.nsf/mf/6202.0">total employment has been growing</a>, the reported level of underemployment (a measure of the desire of workers to work more hours than they do) was also growing for much of 2018. Low wages growth and limited working hours do not help when people are already struggling to afford a house.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/259654/original/file-20190219-121744-1ovadfr.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/259654/original/file-20190219-121744-1ovadfr.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/259654/original/file-20190219-121744-1ovadfr.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=452&fit=crop&dpr=1 600w, https://images.theconversation.com/files/259654/original/file-20190219-121744-1ovadfr.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=452&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/259654/original/file-20190219-121744-1ovadfr.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=452&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/259654/original/file-20190219-121744-1ovadfr.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=569&fit=crop&dpr=1 754w, https://images.theconversation.com/files/259654/original/file-20190219-121744-1ovadfr.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=569&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/259654/original/file-20190219-121744-1ovadfr.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=569&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="caption">National trends in employment and underemployment.</span>
<span class="attribution"><a class="source" href="http://www.abs.gov.au/AUSSTATS/abs@.nsf/DetailsPage/6202.0Dec%202018?OpenDocument">ABS</a>, <span class="license">Author provided</span></span>
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<p>The supply of finance in mortgage markets also depends on the economic cycle. Unfortunately, falling house prices and a deteriorating economic outlook tend to translate to tighter lending conditions. </p>
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Read more:
<a href="https://theconversation.com/no-surplus-no-share-market-growth-no-lift-in-wage-growth-economic-survey-points-to-bleaker-times-post-election-110315">No surplus, no share market growth, no lift in wage growth. Economic survey points to bleaker times post-election</a>
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<p>So while housing prices might be falling in our biggest cities, at the same time it’s becoming harder to get a home loan. The <a href="http://www.abs.gov.au/ausstats/abs@.nsf/mf/5609.0">number of first home buyer dwellings financed fell</a> by more than 5% in the year to November 2018.</p>
<h2>So what’s next for the housing market?</h2>
<p>Change in the total number of properties sold is also a useful leading indicator, meaning that transactions data tend to signal a change in market conditions long before average prices begin to change. The chart below shows the year-on-year growth in transactions peaked in the third quarter of 2017. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/259653/original/file-20190219-121744-1l003vu.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/259653/original/file-20190219-121744-1l003vu.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/259653/original/file-20190219-121744-1l003vu.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=402&fit=crop&dpr=1 600w, https://images.theconversation.com/files/259653/original/file-20190219-121744-1l003vu.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=402&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/259653/original/file-20190219-121744-1l003vu.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=402&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/259653/original/file-20190219-121744-1l003vu.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=505&fit=crop&dpr=1 754w, https://images.theconversation.com/files/259653/original/file-20190219-121744-1l003vu.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=505&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/259653/original/file-20190219-121744-1l003vu.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=505&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="caption">Changes in the number of properties sold in Australia.</span>
<span class="attribution"><span class="source">ABS</span>, <span class="license">Author provided</span></span>
</figcaption>
</figure>
<p>The growth in transactions began slowing, then became negative in the early months of 2018. These changes occurred much earlier than the plateau, then fall, in prices in late 2018. </p>
<p>The outlook is never certain, but it is worth noting that prices very rarely stabilise or begin growing while the transaction volume is still declining.</p>
<p>Like many sectors of the economy, housing markets are cyclical. But what makes the housing market different is the historical fact that periods of falling prices are much less frequent than periods of rising prices. The market will soon return to its long-run unsustainable trajectory of rising prices and declining affordability. </p>
<p>During the current price adjustment, housing affordability may appear to improve slightly. But low wages growth and limited working hours, coupled with lending restrictions, combine to make it just as hard for first home owners to enter the market. </p>
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Read more:
<a href="https://theconversation.com/local-councils-put-affordable-housing-supply-in-the-too-hard-basket-97461">Local councils put affordable housing supply in the too hard basket</a>
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<p>Current circumstances create opportunity elsewhere in the housing system. In particular, modestly falling prices coupled with lenders issuing fewer mortgages to owner-occupiers create fertile conditions for private residential investors. Times like this tend to favour cash buyers rather than those who need to scrape together a deposit and secure a mortgage before they can buy a house. </p>
<p>Paradoxically, then, declining house prices are no better for housing affordability than rising prices.</p><img src="https://counter.theconversation.com/content/111267/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Chris Leishman receives funding from the Australian Housing and Urban Research Institute (AHURI), South Australian Housing Authority, South Australian Government, the United Kingdom's Economic and Social Research Council's Collaborative Centre for Housing Evidence (CaCHE), and United Kingdom government and devolved government departments. </span></em></p>It’s natural to assume that a downturn in the property market is good news for people who’ve been priced out of the market. In practice, they might still not be able to buy a home.Chris Leishman, Professor of Housing Economics, University of AdelaideLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1095682019-01-10T18:24:06Z2019-01-10T18:24:06ZVital Signs: so far, it’s more of a house price blip than a bust in the making<figure><img src="https://images.theconversation.com/files/253188/original/file-20190110-32130-15x2iqa.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">We're unpredictable, but this could be a one-off adjustment.</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>Home prices slid in 2018, in some places by quite a lot.</p>
<p>According to the widely-used <a href="https://www.corelogic.com.au/research/monthly-indices">Corelogic Hedonic Home Value Index</a>, home prices were down 4.8% across the nation in 2018. Sydney was particularly hard hit, down 8.9% and prices in Melbourne slipped 7.0%. Hobart was a bright spot, but an exception, up 8.7%.</p>
<p>You might be dying to ask what “hedonic” means. The word relates to pleasure, in this case the pleasure of owning a home.</p>
<h2>Hedonic. It’s how we compare like with like</h2>
<p>In earlier times monthly house price moves were calculated by comparing the average price of houses sold in one month with the average price of houses sold in the previous month. </p>
<p>But what if the “pleasure” that was sold in that month was different from the pleasure that was sold the previous month? What if, for example, in December mainly good five-bedroom mansions in good suburbs were sold, whereas in January it was mainly one bedroom dumps located where people didn’t want to live? The average recorded price would go down even if the price of individual houses had not. </p>
<p>The hedonic index gets around this by comparing <a href="https://www.corelogic.com.au/research/rp-data-corelogic-home-value-index-methodology">like with like</a> - the price of three-bedroom homes in a middle ranking suburb with the price of three-bedroom homes in the same middle ranking suburb and so on. It’s made up of a lot of indexes combined, and is unaffected by the mix of properties that happen to be sold in any particular month. </p>
<p>The results are not good news for current home owners, but they are worth putting into perspective.</p>
<h2>How far back do you want to go?</h2>
<p>In Melbourne prices are down 7.2% from their peak, but they are no lower than they were as recently as February 2017. In Sydney, prices are no lower than they were in August 2016 according to Corelogic.</p>
<p>So, should we focus on the latest very recent drop in prices, or the incredibly strong growth over the previous 20 years? </p>
<p>The following chart from Corelogic’s Head of Research Tim Lawless demonstrates that long-run growth in Sydney, as well as the fact there have been pretty significant short-run dips along the way.</p>
<p><div data-react-class="Tweet" data-react-props="{"tweetId":"925880013223731200"}"></div></p>
<p>The most obvious point to make is that if you bought recently then the current price drops hurt. If you had a 20% deposit, the latest falls in Sydney and Melbourne have wiped out about half of your starting equity; more if you factor in stamp duty and moving costs.</p>
<p>If you bought a longer time ago, you might feel the sting of the latest price slide just a touch, but you are still well ahead.</p>
<p>So from a personal perspective, it’s natural that some people will care a lot about what’s happened, and others won’t much mind.</p>
<h2>What’ll it mean for the economy?</h2>
<p>The biggest concern is the so-called “wealth effect”. </p>
<p>When home prices fall, homeowners feel (and are) poorer. </p>
<p>It affects how much they are prepared to spend, although as the <a href="https://www.rba.gov.au/publications/rdp/2015/pdf/rdp2015-08.pdf">Reserve Bank and others have pointed out</a> the size of the effect remains unclear.</p>
<p>But it might be bigger than you think. Many of us aren’t rational. We have <a href="http://www.columbia.edu/%7Emd3405/RD_lecture_1_handout.pdf">“reference points”</a>. If, because of the barrage of media reports at the time, we use the start of 2018 (the top of the market) as our reference point, then even those of us who have owned properties for a long time will feel poorer. And because of that, we might spend less.</p>
<p>Since private spending <a href="https://tradingeconomics.com/australia/household-final-consumption-expenditure-etc-percent-of-gdp-wb-data.html">accounts for well over half of Australia’s gross domestic product</a>, spending less can have a big effect.</p>
<h2>What’ll it mean for the banks?</h2>
<p>Australia’s big four banks are the biggest lenders to residential property owners and are among the biggest companies in Australia. </p>
<p>Could the slide in property prices put them in jeopardy?</p>
<p>If a few homebuyers had a 20% deposit and suffered at most maybe a 15% fall in prices, there isn’t a problem, right? </p>
<p>That view is basically correct – except when it’s not.</p>
<p>Some lenders have been bulking up loans to borrowers who earlier took out, say, A$600,000. When their homes came to be worth, say, $1.5 million they lent them more - boosting their loans by most of the extra value.</p>
<p>The practice calls into question the view that only a small number of the most recent buyers are highly leveraged. Many more folks could be – but without the loan-level data that the banks have, we don’t know.</p>
<h2>Is 2018 a good predictor of 2019?</h2>
<p>At the heart of all of these questions is whether the 2018 price falls are likely to continue, which would mean them getting much bigger. </p>
<p>That depends on what caused them.</p>
<p>A key part of it was that banks (at least the big four) lent less than they used to. With less money borrowed, there was less money to bid up prices.</p>
<p>As I have noted before, Australian banks were arguably lending too much; about 25% more than US banks to equivalent borrowers.</p>
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<em>
<strong>
Read more:
<a href="https://theconversation.com/vital-signs-why-now-is-the-right-time-to-clamp-down-on-negative-gearing-107370">Vital Signs: why now is the right time to clamp down on negative gearing</a>
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<p>Post Royal Commission, that’s changed. As has been widely discussed, banks are now looking at borrower’s expenses much more carefully. Too carefully, according to Treasurer Josh Frydenberg who has <a href="https://www.afr.com/news/politics/josh-frydenberg-tells-banks-to-ease-up-on-lending-crackdown-20181109-h17q2g">called on them to lend more</a>.</p>
<p>The important point is that if there has been a one-off adjustment in the borrowing capacity of Australians, then the price falls should stop fairly soon: predictions of more modest falls in 2019 followed by a reset and uptick in 2020 mightn’t be too far off the mark.</p>
<p>If so, the short-term slide will remain for most people, just that.</p>
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<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/vital-signs-we-are-witnessing-a-slowly-deflating-property-bubble-for-now-98624">Vital Signs: we are witnessing a slowly deflating property bubble, for now</a>
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<img src="https://counter.theconversation.com/content/109568/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Richard Holden does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Prices are off, but from unprecedented highs. It could be a one-time adjustment.Richard Holden, Professor of Economics, UNSW SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1066902019-01-07T21:59:52Z2019-01-07T21:59:52ZBuilding wind turbines where they’re not wanted brings down property values<figure><img src="https://images.theconversation.com/files/249559/original/file-20181209-128220-idycsq.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Areas with greater opposition to wind energy development may be more likely to experience negative impacts on property values.</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>The question of whether or not wind turbines have decreased property values in Ontario has been a point of contention in recent years, and fuelled by the rapid expansion of the wind energy industry following the implementation of the <a href="https://www.ontario.ca/laws/statute/09g12">Green Energy Act</a> in 2009. (The current provincial government is in the process of repealing the act.) </p>
<p>Residents in communities with existing and proposed wind farms have felt their concerns have been largely ignored by the provincial government, which is able to override municipal decisions regarding where wind farms can be located. Wind farm development was allowed to proceed despite not reaching resolution on this issue. This is due in part to a lack of scientific evidence regarding these impacts. </p>
<p>Studies in other jurisdictions around the world have not provided a clear answer as to whether property values drop when a wind farm is built nearby. <a href="https://doi.org/10.1016/j.jeem.2015.04.006">Negative impacts</a> on <a href="http://doi.org/10.3368/le.88.3.571">property values</a> have occurred in some jurisdictions <a href="https://doi.org/10.1016/j.jue.2016.09.001">including in the Netherlands</a>, but <a href="http://aresjournals.org/doi/abs/10.5555/rees.33.3.16133472w8338613">not</a> <a href="https://doi.org/10.1016/j.eneco.2014.05.010">in</a> <a href="https://doi.org/10.1007/s11146-014-9477-9">others</a>. </p>
<p>To determine whether property values have changed as a result of wind turbines in Ontario, I <a href="https://doi.org/10.1111/cjag.12030">conducted a study</a> using sales of rural residential properties. In particular, the study focused on counties in southern Ontario where wind farms have been constructed.</p>
<h2>Unwilling hosts</h2>
<p>This study also addresses underlying reasons for the lack of consensus across related studies in other jurisdictions. There are a number of potential contributing factors, including the possibility that differences in attitudes toward wind energy may influence the likelihood of property value impacts. Areas with greater opposition to wind energy development may be more likely to experience negative impacts on property values. I examined the degree to which differences in attitudes influenced property values in Ontario. </p>
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<a href="https://images.theconversation.com/files/249759/original/file-20181210-76980-v59olm.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/249759/original/file-20181210-76980-v59olm.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/249759/original/file-20181210-76980-v59olm.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=900&fit=crop&dpr=1 600w, https://images.theconversation.com/files/249759/original/file-20181210-76980-v59olm.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=900&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/249759/original/file-20181210-76980-v59olm.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=900&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/249759/original/file-20181210-76980-v59olm.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=1131&fit=crop&dpr=1 754w, https://images.theconversation.com/files/249759/original/file-20181210-76980-v59olm.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=1131&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/249759/original/file-20181210-76980-v59olm.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=1131&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="caption">Protesters marching to Liberal leadership convention in Toronto Jan. 26, 2013, in Toronto.</span>
<span class="attribution"><span class="source">Shutterstock</span></span>
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<p>Ontario provides an ideal setting to examine whether differences in attitudes influence property value impacts. To date, 95 municipalities have passed resolutions to declare themselves “<a href="http://ontario-unwilling-hosts.org/">unwilling hosts</a>” for wind farms. They did this to protest the provincial government’s ability to override municipal decisions on the location of wind energy facilities. </p>
<p>While these declarations are only symbolic, they show that most residents oppose wind energy, since these declarations tend to be made in response to requests for public input and feedback from residents. </p>
<p>In contrast, other municipalities within the province have supported wind energy development. As such, the unwilling host designation can be used to identify differences in attitudes toward wind energy across municipalities. </p>
<h2>Property values in unopposed municipalities</h2>
<p>The first component of the study determined whether wind turbines have affected property values in Ontario. I analyzed sales data from more than 22,000 rural residential properties across 14 counties in southern Ontario between 2002 and 2013. Many of these properties are in close proximity to wind turbines. </p>
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Read more:
<a href="https://theconversation.com/lets-create-climate-policy-that-will-survive-elections-104886">Let’s create climate policy that will survive elections</a>
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<p>Wind turbines caused negative impacts on property values up to four kilometres away, with these impacts ranging from a four per cent to an eight per cent decrease in property values. The magnitude of the impact increased as the number of wind turbines in close proximity to the property increased. These results support the concerns of residents of communities with existing and proposed wind farms regarding the potential loss in value of their properties due to wind turbines.</p>
<p>To determine whether differences in attitudes influenced the observed impacts of wind turbines on property values, I divided the sales data into two groups: those in unwilling-host municipalities and those in municipalities that had not made such declarations, which I refer to as “unopposed municipalities.” </p>
<h2>Impact findings on property values</h2>
<p>The analysis of the sales data for each group yielded interesting results. Wind turbines had a negative impact on property values only in unwilling host municipalities, while no impacts were observed in unopposed municipalities. These results suggest that residents’ attitudes toward wind energy may influence the nature of turbine impacts: jurisdictions with greater opposition to wind turbines may be more likely to experience negative impacts on property values. </p>
<p>Prior to my study, there had not been a comprehensive study conducted in the province on the impacts of wind turbines on property values. The results may help to explain the lack of consensus that exists across prior studies regarding this issue. It could be the case that the concerns expressed regarding potential negative impacts draw considerable local attention to this issue. This, in turn, could influence perceptions of turbine impacts and the resulting demand for affected properties.</p><img src="https://counter.theconversation.com/content/106690/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Richard Vyn does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Research has found that wind turbines decrease property values in Ontario, but only when the community is opposed to their presence.Richard Vyn, Associate Professor of Agricultural Economics, University of GuelphLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1037792018-10-12T09:32:10Z2018-10-12T09:32:10ZRenting rights: what England can learn from fairer systems around the world<figure><img src="https://images.theconversation.com/files/240391/original/file-20181012-119123-182nqqt.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/fisheye-shot-new-apartments-buildings-exterior-192503288?src=52LMwmNOIecgDvqnRsPTJw-1-32">Serghei Starus / Shutterstock</a></span></figcaption></figure><p>Record numbers of families now rent privately in Britain. Twice as many <a href="https://www.independent.co.uk/news/uk/home-news/middle-age-rent-uk-house-prices-living-costs-retirement-a8346971.html">middle-aged</a> people rent their homes compared to 2008, and it has been estimated that about one-third of <a href="https://www.resolutionfoundation.org/media/press-releases/up-to-a-third-of-millennials-face-renting-from-cradle-to-grave/">millennials</a> will rent for their whole life.</p>
<p>Renting the house you live in has its advantages as it gives you greater freedom of movement and saves you other costs: insurance, service charge, deposit, mortgage interest, to name a few. Yet, for most people, renting privately is not really a matter of choice. It is the result of stagnant wages and <a href="https://www.resolutionfoundation.org/media/press-releases/britains-increasingly-unevenly-shared-property-wealth-is-driving-up-inequality-after-a-decade-long-fall/">the fact that house values rise much faster than the economy</a>.</p>
<p>Britain is becoming a country of (reluctant) tenants. But the law does not keep the balance fairly between landlord’s interests and tenant’s rights.</p>
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Read more:
<a href="https://theconversation.com/no-dss-how-private-landlords-and-letting-agents-exclude-tenants-on-benefits-102118">'No DSS': how private landlords and letting agents exclude tenants on benefits</a>
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<p>English law on rental evictions does not protect households’ security of tenure. A recent <a href="http://justfair.org.uk/wp-content/uploads/2018/09/JF-Generation-Rent-End-Section21-Sept2018-FINAL.pdf">report</a> by campaign groups Just Fair and Generation Rent shows that a system that allows landlords to evict tenants without reason breaches international law. Yet this is permitted under <a href="https://www.legislation.gov.uk/ukpga/1988/50/section/21">Section 21 of the UK Housing Act 1988</a>.</p>
<h2>Poor housing proliferates</h2>
<p>According to the government’s <a href="https://www.gov.uk/government/statistics/english-housing-survey-2016-to-2017-headline-report">English Housing Survey</a>, the private rental sector has the highest proportion – 38% – of homes with at least one indicator of poor housing such as mould or damp. More than one quarter (27%) of privately rented homes fail the decent home standard, compared to 20% in the case of owner-occupied homes and 13% in the social housing sector.</p>
<p>Many tenants have good reasons to complain about the state of their flat. But English law does not currently require all landlords to maintain a property in a standard that is fit for habitation. The <a href="https://www.legislation.gov.uk/ukpga/1985/70">Landlord and Tenant Act 1985</a> imposes obligations to repair on landlords but only if there is “disrepair” – damp, mould or asbestos not causing structural damage are not covered.</p>
<p>In this context, tenants are at risk of eviction if they take legal action because Section 21 of the Housing Act 1988 permits landlords to evict tenants with no fault and without giving a reason.</p>
<p>The National Audit Office watchdog has <a href="https://www.nao.org.uk/report/homelessness/">documented</a> that the ending of private sector tenancies is the biggest single driver of statutory homelessness in England. Based on official data from the Ministry of Justice and the Ministry of Housing, Generation Rent has <a href="http://www.generationrent.org/no_fault_evictions_drive_up_homelessness">found</a> a tight correlation between homelessness and Section 21 evictions: 92% in London and 88% outside of London.</p>
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<img alt="" src="https://images.theconversation.com/files/240393/original/file-20181012-119123-1qkcwna.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/240393/original/file-20181012-119123-1qkcwna.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=337&fit=crop&dpr=1 600w, https://images.theconversation.com/files/240393/original/file-20181012-119123-1qkcwna.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=337&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/240393/original/file-20181012-119123-1qkcwna.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=337&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/240393/original/file-20181012-119123-1qkcwna.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=424&fit=crop&dpr=1 754w, https://images.theconversation.com/files/240393/original/file-20181012-119123-1qkcwna.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=424&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/240393/original/file-20181012-119123-1qkcwna.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=424&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption">Rising homelessness is linked to evictions.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/london-uk-october-01-2013-homeless-694046491?src=1mxQXiXQIQ6EaWWJrhrL9A-1-0">jax10289 / Shutterstock.com</a></span>
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<h2>Lessons from others</h2>
<p>The lack of awareness and understanding of tenants’ personal circumstances is not unique to England. My own research in Spain on <a href="https://www.tandfonline.com/doi/abs/10.1080/13642987.2015.1073716">foreclosures and mortgage evictions</a> and on <a href="https://www.openglobalrights.org/eviction-rights-in-spain-no-room-of-one-s-own/">rental evictions</a> has shown similar patterns. If the English and the Spanish markets have something in common it is precisely the rise of renting as a form of tenure following rapidly growing prices, which makes home ownership unaffordable for most families.</p>
<p>Security of tenure and fair treatment when it comes to rental evictions are perfectly compatible with landlords’ right to private property. Law and practice in other places with longer traditions in the rented housing sector prove that things can be done differently if there is will for it.</p>
<p><a href="http://www.legislation.gov.uk/asp/2016/19/contents/enacted">Scotland</a>, for example, distinguishes between “mandatory” and “discretionary” grounds of eviction. In discretionary cases, landlords must prove that relevant circumstances exist but the court will only grant recovery of possession orders if it considers it is reasonable to do so.</p>
<p>In <a href="https://sfrb.org/ordinance-regulations">San Francisco</a>, one of the most expensive cities in the US, tenants that are evicted with no fault have a right to a relocation payment from the landlord.</p>
<p><a href="http://booksandjournals.brillonline.com/content/journals/10.1163/22134514-00301002">South African</a> courts usually urge public authorities to report on their capacity to provide alternative accommodation to those in need who would otherwise be rendered homeless by the eviction. Authorities are expected to determine occupants’ needs by engaging with them meaningfully regarding their circumstances. Where occupants cannot afford the available private housing and the eviction would lead to homelessness, the court makes the order contingent on public provision of alternative accommodation. If necessary, landlords are expected to wait until the authorities are able to provide a housing solution.</p>
<p>In the <a href="https://www.rug.nl/research/portal/publications/human-rights-and-protection-against-eviction-in-antisocial-behaviour-cases-in-the-netherlands-and-germany(010d472a-b7e4-4d18-ba9f-53ff935e822f)/export.html">Netherlands and Germany</a>, courts are entitled to take tenants’ personal circumstances into account to balance tenant interests with those of landlords when judging the fairness of the lease termination.</p>
<p>England must pay close attention because alternatives do exist. With renting in England a reality for the foreseeable future, no-fault evictions must end and best practice sought from places where renting is the norm and fairer systems are in place.</p><img src="https://counter.theconversation.com/content/103779/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Koldo Casla is the Policy Director of Just Fair, an organisation that monitors and campaigns for economic and social rights in the UK.</span></em></p>Record numbers of families rent privately in England. But the law has not kept a fair balance between landlord and tenant rights.Koldo Casla, Research Associate, Institute of Health & Society, Newcastle UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/986242018-06-21T18:48:38Z2018-06-21T18:48:38ZVital Signs: we are witnessing a slowly deflating property bubble, for now<figure><img src="https://images.theconversation.com/files/224161/original/file-20180621-137714-1uhm4wl.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">The air may fizzle out of the Australian balloon, or it may burst violently.</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p><em>Vital Signs is a regular economic wrap from UNSW economics professor and Harvard PhD Richard Holden (@profholden). Vital Signs aims to contextualise weekly economic events and cut through the noise of the data affecting global economies.</em></p>
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<p>In a week that was fairly light on data releases, let’s return to Australia’s perennial favourite topic – house prices. Painful though it may be for existing property owners who are selling, we are witnessing what a bubble slowly deflating back to reality looks like.</p>
<p><a href="http://www.abs.gov.au/ausstats/abs@.nsf/mf/6416.0">Data released Tuesday</a> showed that across Australia’s eight capital cities prices fell 0.7% in the first quarter of 2017. Sydney was hardest hit, with prices down 1.2%. Melbourne and Brisbane experienced 0.6% declines and Perth prices were down 0.9%.</p>
<p>Price declines were more subdued over the previous 12 months, or were even still up over the period. Sydney prices were down 0.5% on the year, but Melbourne prices were still up strongly (6.2%) and Brisbane showed 1.6% annual growth. Perth, where prices have been under pressure for some time, registered a 1.5% fall over the last year.</p>
<p>This downward price pressure is consistent with a reduction in <a href="https://www.corelogic.com.au/auction-results">auction clearance rates documented by CoreLogic</a>. Last week, clearance rates averaged 56.9% across the country and just 55.8% in Sydney and 58.7% in Melbourne. Compare this to a year ago when the capital city average was 66.7%, Sydney was at 68.0% and Melbourne at 71.0%. And this doesn’t even factor in that auction volumes have dropped this year.</p>
<p>So here’s the deal. Fewer people are trying to sell their residential properties. Those that try are having less success in doing so. Those that do succeed are getting lower prices.</p>
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Read more:
<a href="https://theconversation.com/vital-signs-the-spooky-mortgage-risk-signs-our-bankers-are-ignoring-85591">Vital Signs: the spooky mortgage risk signs our bankers are ignoring</a>
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<p>Yet it pays to take a longer-term view. As <a href="https://www.rba.gov.au/monetary-policy/rba-board-minutes/2018/2018-06-05.html">the minutes of the last RBA board meeting noted</a>:</p>
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<p>… housing prices were still 40% higher in Sydney and Melbourne than at the beginning of 2014, while housing prices in Perth had fallen by around 10% over the same period.</p>
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<p>The big question is whether the housing market will continue to deflate slowly, or whether there is going to be an abrupt “pop”.</p>
<p>A big correction to property prices would require a major trigger. The most likely candidate for that trigger is interest-only loans. </p>
<p><a href="http://www.abc.net.au/7.30/concerns-as-interest-only-loans-roll-over-to/9887938">More and more attention is finally being paid</a> to dangers caused by Australia’s profligate use of such loans. <a href="https://theconversation.com/vital-signs-the-spooky-mortgage-risk-signs-our-bankers-are-ignoring-85591">As I wrote last year</a>, at the peak a staggering 40% of residential mortgages in Australia were interest only.</p>
<p>The Australian Prudential Regulation Authority (APRA) <a href="https://theconversation.com/vital-signs-interest-only-loans-are-an-economic-debacle-that-could-bust-the-property-market-95518">stepped in</a> last year, capping new interest-only loans at 30% of new loans. That, along with a tightening of underwriting standards by banks, has led to a sharp drop in such loans. </p>
<p>The latest figures put the proportion of interest-only loans at <a href="https://www.businessinsider.com.au/australia-interest-only-mortgage-restrictions-apra-rba-2018-3">15.2% of new issuances</a>.</p>
<p>The RBA has been <a href="https://www.rba.gov.au/speeches/2018/sp-ag-2018-04-24.html">pushing an upbeat story</a> about how this shakes out. As they tell it, the A$120 billion a year of interest-only loans coming due will be smoothly transitioned to principal-and-interest loans for most people.</p>
<p>Well, perhaps. I certainly hope so. </p>
<p>But for many people this transition will involve increases in monthly repayments of 30-40%. At a time when wages growth has been persistently sluggish, many people don’t have much wiggle room.</p>
<p>Interest-only loans typically have a five-year term and then need to be refinanced or become principal-and-interest loans. For a whole lot of folks, an interest-only rollover ain’t going to happen. Worse, the largest volumes of interest-only loans were written in 2013-2016. </p>
<p>So we are about to see a three-year wave of shifts to principal-and-interest loans. </p>
<p>Worse still, the loans originated in those years were heavily mediated by mortgage brokers whose incentives were all about moving volume, not quality. <a href="http://www.abc.net.au/news/2017-09-11/500b-dollars-of-liar-loans-in-australia-ubs/8892030">Widely cited research</a> from investment bank UBS about the prevalence of so-called “liar loans” gives one every reason to be really worried about the ability of these borrowers to make a mortgage payment that has increased by a third or more per month.</p>
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Read more:
<a href="https://theconversation.com/vital-signs-poor-wage-growth-means-interest-rates-could-be-low-for-a-long-time-98240">Vital Signs: poor wage growth means interest rates could be low for a long time</a>
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<p>And the rosy scenario the RBA keeps pushing involves look at the <em>average</em> buffer and embedded equity that households have. But that misses the economics 101 point that it is the marginal borrower that determines equilibrium prices, not the average. </p>
<p>If I’m selling hot dogs I don’t care what the average person is willing to pay for a hot dog, I care what the last person I might sell to is willing to pay, for she determines the price.</p>
<p>And, in a moment of gaping honesty eight weeks ago, the RBA’s Chris Kent <a href="https://www.rba.gov.au/speeches/2018/sp-ag-2018-04-24.html">highlighted the difference between the average and marginal borrower</a>, saying:</p>
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<p>… about half of owner-occupier loans have prepayment balances of more than six months of scheduled payments. While that leaves half with only modest balances, some of those borrowers have relatively new loans.</p>
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<p>It doesn’t matter than some of them are new borrowers – other than that they bought at the height of the bubble, making them more susceptible to financial stress than other borrowers. The fact is that a whole bunch of folks are on the wire. If their payments go up they are going to struggle to make them. And if a lot need to sell at once then, as they say at NASA, “Houston, we have a problem.”</p>
<p>The air may fizzle out of the Australian balloon, or it may burst violently. Either way we should be asking hard questions about why APRA waited so late to act on interest-only loans, liar loans and underwriting standards in general. Very hard, very public questions.</p><img src="https://counter.theconversation.com/content/98624/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Richard Holden does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>A whole bunch of folks are on the wire, and if their housing payments go up they are going to struggle.Richard Holden, Professor of Economics and PLuS Alliance Fellow, UNSW SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/891442017-12-14T19:15:16Z2017-12-14T19:15:16ZVital Signs: Australia heads into 2018 with mixed economic signals<figure><img src="https://images.theconversation.com/files/199165/original/file-20171214-27593-171g8ju.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">It's hard to get a fix on where Australia's economy is headed.</span> <span class="attribution"><span class="source">Garry Knight/Flickr</span>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span></figcaption></figure><p><em>Vital Signs is a weekly economic wrap from UNSW economics professor and Harvard PhD Richard Holden (@profholden). Vital Signs aims to contextualise weekly economic events and cut through the noise of the data affecting global economies.</em></p>
<p><em>This week: the housing market is still cooling, but not disastrously so, consumers remain optimistic, but business is cautious, and all eyes will soon turn to Christmas retail sales.</em></p>
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<p>Since housing is the main thing that Australians seem to talk about (even when the Ashes is on), let’s start with that.</p>
<p>The ABS <a href="http://www.abs.gov.au/ausstats/abs@.nsf/mf/6416.0">residential house price index</a> for the September quarter showed a small decline Australia wide, with prices falling 0.2%. Sydney prices were down 1.4%, while Melbourne was still up 1.1%.</p>
<p>This was, as we are now used to, met with press commentary about how the <a href="http://www.abc.net.au/news/2017-12-12/house-prices-off-the-boil-will-population-keep-things-simmering/9250146">housing boom is well-and-truly over</a>, and with various other shrieks of angst. Really? Melbourne just didn’t grow as fast is it did before. And Sydney, though down 1.4% on the quarter, is still up a whopping 9.4% over the past 12 months.</p>
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Read more:
<a href="https://theconversation.com/four-ways-an-australian-housing-bubble-could-burst-76505">Four ways an Australian housing bubble could burst</a>
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<p>On one level, the reaction makes no sense at all. On another, as I wrote <a href="https://theconversation.com/vital-signs-the-spooky-mortgage-risk-signs-our-bankers-are-ignoring-85591">in a previous column</a>, the implications of even modest falls could be large, given how residential lending is structured. If Australia’s banks are lending people a massive chunk of their disposable income, marking-to-market on a regular basis and issuing a lot of interest-only loans, then even small falls can have big effects on household spending and even defaults. And. They. Are.</p>
<p>The Westpac consumer sentiment index came in stronger than expected, rising 3.6% in December to 103.3 points (recall 100 in these indices is the breakeven between optimists and pessimists). Westpac’s chief economist Bill Evans said:</p>
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<p>This is a surprisingly strong result and confirms the lift we have seen in the index over the last three months.</p>
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<p>This contrasted with the news on business confidence. The <a href="https://business.nab.com.au/wp-content/uploads/2017/12/201711-nab-business-survey.pdf">NAB Monthly Business Survey</a> business conditions index dropped 9 points. This still left it at +12, however, which is above the long-run average of +5 index points. Moreover, it appeared that some of the business concern was about wages edging higher, which would be a good thing for workers and the economy more generally.</p>
<p>As I have said in Vital Signs many times, sluggish wage growth has been a persistent problem among advanced economies, and Australia is no exception. Even early signs of an increase bode well for the economy more broadly – and business will ultimately benefit from that. But these are very early signs.</p>
<p>Unemployment in Australia remained stubbornly high at 5.4% in November. A large 61,600 jobs were created, but the labour force participation rate rose to 65.5%, leaving the overall unemployment rate unchanged. It will be important to see in coming months if that pace of job creation can be maintained – for that is a prerequisite for a genuine drop in unemployment.</p>
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Read more:
<a href="https://theconversation.com/vital-signs-economics-cant-explain-why-unemployment-and-inflation-are-both-low-85824">Vital Signs: economics can't explain why unemployment and inflation are both low</a>
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<p>Thursday morning Australian time, the US Federal Reserve raised interest rates for the third time this year, bringing the target Fed Funds Rate to the 1.25-1.50% band.</p>
<p>The Fed also suggested in <a href="https://www.federalreserve.gov/newsevents/pressreleases/monetary20171213a.htm">its statement</a> that we can expect further, gradual rises, in 2018, saying: </p>
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<p>The Committee expects that economic conditions will evolve in a manner that will warrant gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run.</p>
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<p>Most market participants interpret this as meaning we can expected three 25 basis point hikes next year.</p>
<p>As has been the case for some time now, the recovery in the US looks to be self-sustaining and robust. In Australia, we continue to see very mixed signals across different aspects of the economic map. </p>
<p>The housing market looms as a huge potential problem, with regulators only taking action relatively recently to begin to rein in the extravagant lending of a decade or more. And pretty modest action at that.</p>
<p>The next major thing to watch for in Australia is the all-important holiday season retail sales figures. And, as ever, the housing market.</p><img src="https://counter.theconversation.com/content/89144/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Richard Holden is an ARC Future Fellow.</span></em></p>Housing and wages loom as stubborn problems that could bring our economy unstuck in the year ahead.Richard Holden, Professor of Economics and PLuS Alliance Fellow, UNSW SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/866182017-11-02T19:04:11Z2017-11-02T19:04:11ZVital Signs: the US economy is outpacing Australia’s and we should all ask why<figure><img src="https://images.theconversation.com/files/192961/original/file-20171102-26483-ue6zk8.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Image sourced from shutterstock.com</span></span></figcaption></figure><p><em>Vital Signs is a weekly economic wrap from UNSW economics professor and Harvard PhD Richard Holden (@profholden). Vital Signs aims to contextualise weekly economic events and cut through the noise of the data affecting global economies.</em></p>
<p><em>This week: housing credit is still propping up lending in Australia, while the US economy goes from strength to strength.</em></p>
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<p>Data this week pointed to a continued shakiness in the Australian economy, while the robust US recovery continued.</p>
<p>In Australia, <a href="http://rba.gov.au/statistics/frequency/fin-agg/2017/fin-agg-0917.html">private-sector lending</a> grew at just 0.3%, compared to 0.5% in August. Perhaps more worryingly, business lending dropped 0.1%. It was, again, housing credit growth that propped up the overall figures, growing 0.5% for the month.</p>
<p>Worse still, new home sales fell 6.1% in September, compared to August, according to the Housing Industry Association. So Australians aren’t borrowing much, except to finance the swapping around of each other’s houses at higher and higher prices. Note to picky readers: yes, prices fell a tiny bit in Sydney last month (0.1%), but are still up 10.5% year-on-year.</p>
<p>The US labour market bounced back from the hurricane season, adding 235,000 private sector jobs, according to data from payroll provider ADP. This wasn’t merely a bounce back — it exceeded expectations of a 200,000 gain. This was the biggest gain since March and further evidence of the strong US recovery.</p>
<p>It was not surprising, then, that Conference Board figures showed <a href="https://www.bloomberg.com/news/articles/2017-10-31/u-s-consumer-confidence-index-rises-to-highest-level-since-2000">strong consumer confidence</a>. What was striking, however, was just how strong those figures were. The confidence index rose to 5.3 points to 125.9 – the highest since December 2000. The present conditions measure was also at its highest level since 2001.</p>
<p>The US Federal Reserve kept interest rates on hold at a band of 1.0-1.25% at this week’s meeting, but signalled a fairly high likelihood of a rate rise when they meet in December. As the <a href="https://www.federalreserve.gov/newsevents/pressreleases/monetary20171101a.htm">statement</a> put it:</p>
<blockquote>
<p>The Committee expects that economic conditions will evolve in a manner that will warrant gradual increases in the federal funds rate.</p>
</blockquote>
<p>Perhaps the only real wrinkle is that inflation remains stubbornly low, despite unemployment being at 4.2%. Some measures of inflation expectations are rising, so the best bet is for a 25 basis point rise in December.</p>
<p>The Fed’s statement made pretty explicit how they think about balance these factors, stating: </p>
<blockquote>
<p>the Committee continues to expect that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace, and labor market conditions will strengthen somewhat further. Inflation on a 12-month basis is expected to remain somewhat below 2 percent in the near term but to stabilize around the Committee’s 2 percent objective over the medium term.</p>
</blockquote>
<p>Of course, current Fed Chair Janet Yellen’s term concludes in February next year, and it is being widely reported that President Trump will not reappoint her. Rather he seems set (to the extent that is possible with him) to <a href="https://www.bloomberg.com/news/articles/2017-11-01/powell-to-be-trump-s-nominee-for-fed-chair-replacing-yellen-wsj">appoint Jay Powell as Chair.</a></p>
<p>I will have more to say about that in future columns, but the main thing to note here is that Powell is extremely likely to continue with the path of monetary policy that Yellen has laid out.</p>
<p>So why is it that the US – which suffered a major downturn – seems to have a stronger economy than Australia – which did not even go into recession in 2008-09?</p>
<p>One view is that the US went through a process of Schumpetarian “creative desctruction”. Homeowners who couldn’t afford their properties got foreclosed on, investment banks that weren’t viable went bust, and the rest of the financial system was recapitalised.</p>
<p>Australian banks, by contrast have made some progress in getting their funding structure to be less short-term and dependent on US capital markets – but only so much. And it seems quite possible that they continue to make questionable loans – particularly interest-only loans – as I wrote about <a href="https://theconversation.com/vital-signs-the-spooky-mortgage-risk-signs-our-bankers-are-ignoring-85591">here</a>, and spoke about <a href="https://thejollyswagmen.com">here</a>. </p>
<p>A second view is that the US economy is better able to adapt to the changing nature of the modern economy. It has much more flexible labour markets – although much harsher and less rewarding for average workers.</p>
<p>Perhaps it is neither of these, but presumably both the Reserve Bank and Treasury are trying to understand what looks like a striking different between the US and Australian experiences.</p><img src="https://counter.theconversation.com/content/86618/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Richard Holden is an ARC Future Fellow.</span></em></p>Why is it that the US – which suffered a major downturn – seems to have a stronger economy than Australia , which did not even go into recession in 2008-09?Richard Holden, Professor of Economics and PLuS Alliance Fellow, UNSW SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/843532017-10-05T08:38:23Z2017-10-05T08:38:23ZCan Britain really cope with a fall in housing prices?<figure><img src="https://images.theconversation.com/files/188760/original/file-20171004-18533-1evcn8p.jpg?ixlib=rb-1.1.0&rect=80%2C246%2C2221%2C1294&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/aerial-view-western-side-city-bath-128760275?src=MpqAkE79TcP3SsXP3d-U_A-2-21">antb/Shutterstock</a></span></figcaption></figure><p>Britain is locked in a seemingly constant battle with the burden of its overheated housing market. Theresa May <a href="http://www.bbc.co.uk/news/uk-politics-41493370">has announced measures</a> at the Conservative Party conference designed, at the very least, to dampen criticism over a lack of housing and ever-increasing prices. </p>
<p>It is unclear for now just what impact May’s announcement for land releases and an extra £2 billion for affordable housing may have. After all, the UK’s housing stock is valued at <a href="https://www.ft.com/content/4906a246-dcb7-11e6-86ac-f253db7791c6">close to £7 trillion</a>. But her announcement comes after London real estate prices registered their <a href="http://www.telegraph.co.uk/property/house-prices/asking-prices-london-fall-29pc-dragging-average-uk-property/">biggest fall in a decade</a>, stoking expectations for further drops in real estate prices. </p>
<p>But what would falling house prices mean for Britain? How might it affect employment, household consumption, investment, the government deficit and, critically, the UK current account – the net measure of cash flows in and out of the economy. </p>
<h2>The greater fool</h2>
<p>Brexit and associated uncertainty about the future of the UK financial sector are making real estate investors, home buyers and households more cautious. One of the things that has fuelled London real-estate prices over the years is <a href="http://www.investopedia.com/terms/g/greaterfooltheory.asp">the “greater fool” mechanism</a>. Buyers knew that a property was expensive, and perhaps ridiculously expensive, but they counted on the fact that they could sell it later to a “greater fool” at an even higher price, for a handsome profit. </p>
<p>That phenomenon was perhaps best displayed in the first recorded crisis in free markets. <a href="https://www.focus-economics.com/blog/tulip-mania-dutch-market-bubble">Tulip mania</a> in 17th century Holland built to a crescendo which saw single, rare tulip bulbs change hands for extraordinary sums. Historian Mike Dash has <a href="https://www.amazon.co.uk/Tulipomania-Coveted-Extraordinary-Passions-Aroused/dp/0753827999">described it as</a> enough to “purchase one of the grandest homes on the most fashionable canal in Amsterdam for cash, complete with a coach house and an 80 foot garden”.</p>
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<span class="caption">Tulips in Keukenhof.</span>
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<p>As tulip mania went on to show, however, if prices show indications of a fall, the upward trend reverses violently. If property investors become skittish, they will try to sell before prices fall further, and all of them at the same time. Property values built over decades could collapse within months: the expectation of falling prices causes the falling prices.</p>
<p>This mechanism is a real danger in London which relies heavily on local and international investors who view properties not as a home but as a commodity, readily sold to maximise profit. In 2013 alone, international investors accounted <a href="https://www.ft.com/content/dcc2032a-eed3-11e2-98dd-00144feabdc0">for 82% of London property activity</a>. </p>
<h2>Falling for it</h2>
<p>However, most properties in the UK still belong to households. Families, by and large, don’t need to sell. So what would falling property prices mean for them? </p>
<p>First, many pension funds and investment bonds rely on UK property to generate income for their beneficiaries. Second, we have what economists call the Wealth Effect. </p>
<p>Economists <a href="http://bfi.uchicago.edu/files/FriedmanLegacy.pdf">have long associated</a> consumers’ perceived real estate wealth with spending behaviour: if you believe your house is worth a lot, you feel financially secure. And then you allow yourself to save less and spend more. Just consider the rising number of people who plan to subsidise their retirement <a href="http://www.telegraph.co.uk/finance/personalfinance/borrowing/mortgages/11765565/Record-number-of-pensioners-using-homes-as-cash-machines-to-fund-retirement.html">with wealth generated by their homes</a>. </p>
<p>If their assumed valuations start to look shaky, these people will spend less to build up their savings. The pain would be felt by many: <a href="https://www.theguardian.com/society/2016/aug/02/home-ownership-in-england-at-lowest-level-in-30-years-as-housing-crisis-grows">about 64% of households</a> in England are owner-occupiers. </p>
<p>The Wealth Effect is important in most developed economies but even more so in the UK which relies on <a href="https://www.theguardian.com/business/2017/jul/18/uk-growth-consumer-spending-pwc-economy-brexit">ever-rising levels of consumer spending</a> for its growth. A 10% fall in the value of dwellings in the UK would correspond to a loss of wealth equivalent to <a href="http://www.worldstopexports.com/car-exports-country/">more than the value of all the cars exported</a> from the UK in a decade. </p>
<h2>Ripple effects</h2>
<p>The climate of economic uncertainty, reduced consumption and falling real estate values brings an additional problem for the UK. Britain has long had a trade deficit, but it has also benefited from <a href="http://www.telegraph.co.uk/business/2016/07/05/here-are-the-five-biggest-risks-facing-the-uk-economy/">positive foreign direct investment</a>. </p>
<p>The Current Account itself has been in the red <a href="https://www.ons.gov.uk/economy/nationalaccounts/balanceofpayments/timeseries/aa6h/ukea">for nearly 20 years now</a> but the hundreds of billions of inward foreign investment channelled to UK property <a href="http://wilsonwellsproperty.co.uk/propertynews/2016/2/4/record-foreign-investment-in-uk-commercial-property-but-it-is-slowing">over the same period</a> meant that this deficit remained manageable – just about. </p>
<p>According to the Bank of England, overseas companies <a href="http://www.telegraph.co.uk/business/2016/07/05/here-are-the-five-biggest-risks-facing-the-uk-economy/">have accounted for roughly half</a> of all UK commercial real estate transactions since 2013. If international investors expect prices to fall in any sustained way, the inflow of money would stop and many would sell up. Why buy or hold an asset just at the start of what might be a long decline? </p>
<p>This would not only put pressure on real estate prices but would affect <a href="http://www.bpf.org.uk/about-real-estate">UK GDP</a>, reduce government revenues and worsen the UK Current Account position. The <a href="http://www.bbc.co.uk/news/business-41369239">credit rating of the UK</a> would come under more pressure, and trillions of UK government debt would cost more to refinance. Then the UK government deficit <a href="https://www.ifs.org.uk/uploads/publications/bns/BN_182.pdf">would deteriorate further</a>, taxes might rise to cover for this and the domino effect would be in full cry, spreading to all sectors of the economy, <a href="http://uk.businessinsider.com/brexits-similarities-to-greek-economy-2017-6">similar to events in Greece</a>. </p>
<h2>Policy plays</h2>
<p>Real estate values are critical to the UK’s prosperity. Households, pension funds and businesses have invested heavily; most of the country has, in one way or another, skin in this game. Britain may need to wean itself of its property addiction, but it also needs to sustain confidence in the single asset class that counts for <a href="https://www.ons.gov.uk/news/news/ukworth88trillion">almost two thirds of its wealth</a>. </p>
<p>It is deeply difficult politically to sell that story, however, when the understandable clamour is to make housing more affordable. In a move designed to win over younger voters, May has imposed <a href="https://www.gov.uk/government/news/changes-to-tax-relief-for-residential-landlords">punitive taxation on landlords</a>, cutting one of the life-lines of UK real estate and <a href="https://www.cnbc.com/2017/07/17/international-landlords-uk-property-market.html">driving many out of the market</a>. The new measures announced at the Conservative party conference apply further pressure. </p>
<p>May is desperate for a positive message but the implications of targetting the real estate market right now are huge. Britain’s Brexit fumbling is <a href="https://www.theguardian.com/politics/2017/jul/17/uk-business-confidence-britain-economic-growth-brexit-anxiety">already failing to inspire confidence</a>. The fear has always been that Brexit would spark a period of stagnation, but the danger of deeper, more accelerated damage now seems real, and the potential effect on property values and the economy stark. </p>
<p>The UK government should act decisively. This would require the continuation of loose monetary policy, a reinstatement of tax incentives for real estate investment and, of course, a real plan for Brexit and the future of London’s financial services industry.</p><img src="https://counter.theconversation.com/content/84353/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Alexander Tziamalis does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Theresa May wants to rapidly increase the supply of affordable homes, but will have to tread carefully on Britain’s talismanic property wealth.Alexander Tziamalis, Senior Lecturer (Associate Professor) in Economics and Consultant, Sheffield Hallam UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/822552017-08-10T20:07:08Z2017-08-10T20:07:08ZVital Signs: that feeling you get when the economy can’t be explained by economic models<figure><img src="https://images.theconversation.com/files/181624/original/file-20170810-20484-dvs8co.png?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">What if we're just not as predictable as we used to be?</span> <span class="attribution"><span class="source">Image sourced from shutterstock.com</span></span></figcaption></figure><p><em>Vital Signs is a weekly economic wrap from UNSW economics professor and Harvard PhD Richard Holden (@profholden). Vital Signs aims to contextualise weekly economic events and cut through the noise of the data affecting global economies.</em></p>
<p><em>This week: businesses seem confident, consumers less so, China trade slows, Australian housing finance flattens, and the US economy is growing but remains hard to call.</em></p>
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<p>Some good news this week on business confidence. The <a href="http://business.nab.com.au/nab-monthly-business-survey-july-2017-25783/">NAB monthly business survey for July</a> showed business conditions rising to the highest level since 2008. The business conditions index was at +15 “index points”, triple the long-run average. The business confidence index rose 4 points to +12.</p>
<p>There was a sting in the tail, however. NAB chief economist Alan Oster said: </p>
<blockquote>
<p>We remain apprehensive about how the disconnect between the business and consumer sectors will be resolved – especially in light of sluggish retail conditions in July. Additionally, the previously emphasised hurdles to growth – elevated underemployment, household debt and peaks in LNG exports and housing construction – remain firmly in place.</p>
</blockquote>
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<em>
<strong>
Read more:
<a href="https://theconversation.com/young-educated-and-underemployed-are-we-building-a-nation-of-phd-baristas-53104">Young, educated and underemployed: are we building a nation of PhD baristas?</a>
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<p>So why are businesses fairly confident when the consumer side of the economy looks downbeat? That’s a good and hard question – and I don’t know the answer. But a concerning one would be that businesses are confident for two reasons: the economy is bad enough that the RBA will have to keep interest rates low, and wage growth is so sluggish that profits will continue to get a boost.</p>
<p>In fact, consumer confidence looks to be getting worse. Not long after the NAB report was released, the Westpac-Melbourne Instute announced its consumer sentiment index fell from 96.6 to 95.5 last month. That marks a remarkable ninth month in a row that the index has declined.</p>
<p>One thing that should cast a further shadow over the Australian economy is the trade figures of our largest trading partner, China. Both imports and exports slowed in July, with imports growing at 11% compared to forecasts of 16.6%. Exports grew at 7.2% compared to forecasts of 10.9%.</p>
<p>Taken together these point to slowing domestic demand in the Chinese economy. On the one hand, this is to be expected over time – as developing economies get bigger their GDP growth rates tend to slow down. On the other hand, that’s hardly good news for Australia. After all, it was the massive ramp-up in the growth of the Chinese economy that drove the commodities boom.</p>
<p>We also learned that the CPI in China in July was up 1.4%, compared to expectations of 1.5%. This seems to reflect a response to monetary policy tightening by the Chinese government aimed at reducing the high levels of debt in the economy.</p>
<h2>Cooling the housing market</h2>
<p>There has been a different type of policy tightening in Australia in the last year, with APRA instituting so-called <a href="http://www.apra.gov.au/MediaReleases/Pages/17_11.aspx">macroprudential measures</a> to address aspects of the housing market. These have led to increases in interest rates for investors, among other things.</p>
<p><a href="http://www.abs.gov.au/ausstats/abs@.nsf/mf/5609.0">ABS housing finance figures for June</a> showed some evidence of these having effect. The value of housing finance for all dwellings was $32.93 billion, flat from the previous month. Yet owner-occupier loans were up 0.5% and investor loans down 0.9%.</p>
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Read more:
<a href="https://theconversation.com/vital-signs-have-we-finally-reached-peak-house-prices-78519">Vital Signs: have we finally reached 'peak' house prices?</a>
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<p>The main figure to come out of the US was consumer credit. It rose by US$12.4 billion in June compared to expectations of US$15.5 billion. It’s a little hard to know what to read into this. It could be that it reflects a genuinely stronger labour market and less need for credit, or it could be a sign of lower consumer confidence.</p>
<p>The slew of numbers across various major economies this week continue to suggest a mixed picture. Businesses in Australia are happy, consumers are sad. The Chinese economy is slowing, but may be getting its debt problem under control. The US economy is growing relatively strongly, but consumers are borrowing less.</p>
<p>All this again points to the fact that the macroeconomic models of the past no longer seem to capture the current economy. And that presents a significant challenge for policymakers.</p><img src="https://counter.theconversation.com/content/82255/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Richard Holden is an ARC Future Fellow,</span></em></p>The slew of numbers across various major economies this week continue to suggest a mixed picture.Richard Holden, Professor of Economics and PLuS Alliance Fellow, UNSW SydneyLicensed as Creative Commons – attribution, no derivatives.