“It used to be easy for a young couple to find a place to live. But this new generation is coming of age without access to decent housing. Even if they get a good job, they’re priced out of the market, forced to live as adults with their parents, or settle with cramped living conditions.”
Does that sound familiar? It should. In recent weeks, I’ve heard people utter almost exactly these sentences about their neighbourhoods in Washington, in Beijing, in Nairobi, in London, in Mumbai and in Toronto.
If there is a global problem, this is it: There is not enough housing, to rent or to buy, at a price that people with decent but ordinary employment can afford.
We have come to think of this as a natural state of affairs. In fact, it makes no sense at all: Housing is a basic, easy-to-create amenity. If there is a large demand, and people are willing to pay, shouldn’t there be plenty of people who want to make a buck by creating it? It should be one of the world’s more basic markets.
But it isn’t. Here in London, there will be 374,000 new households over the next few years chasing only 214,000 new housing units. In Toronto, there were 9,000 vacant rental units in 2010, and around 70,000 households in the market for one. In Beijing, average apartments now cost 27 times the average salary. People, for some reason, don’t want to go into the housing business.
Mind you, people do want to go into the real-estate business: The buying and selling of property is a red-hot market in most countries. It’s just that people don’t want to put more housing on that land.
We have come to see property as a portfolio investment rather than as a basic amenity. So for those previous-generation middle-class people (like me) who do own homes, a market failure looks like a gift.
“Every time house prices fall, the national newspapers say there is a housing crisis,” says Alan Gilbert, a housing-policy specialist at the University College of London. “I would argue otherwise – the housing situation is better when house prices are stable or falling – because that means that demand is being outstripped by supply.”
I met Dr. Gilbert at an Oxford University summit on the housing shortage. What’s most interesting is that the housing crises in places like Kenya and those in places like Canada have the same basic causes.
Those fast-rising (and occasionally fast-falling) property values are a big root cause. After being burned in the subprime crisis, banks are wary to lend to new home buyers – it’s hard in North America and Europe, even harder in China, where you can only borrow 50 per cent of a home’s value, and you have to be rich; it’s almost impossible in Africa. I was told that the governor of the Bank of Kenya isn’t paid enough to get a mortgage in Africa.
Worse, banks are even more wary to lend to people wanting to build any but the most expensive rental-housing projects. That’s because property values rise so fast that the project’s rent-based business model might not make sense after a few years. And there are rarely government incentives (such as tax breaks) to create equity-financed rental housing, which should be a priority.
Governments seem supremely uninterested in making the creation of housing a desirable pursuit. We’re clogged with zoning policies, rent-control laws, minimum-frontage restrictions, planning requirements – none of which do any good – and, most of all, a shocking fiscal bias toward existing owners.
If we really wanted housing to be profitable and plentiful, we’d tax owners on the annual rise in value of their property – a Land Value Tax. This has two benefits: First, you’re taxing a non-productive source of wealth, whereas income and corporate taxes can stifle innovation and risk-taking.
Second, because buyers and sellers know the tax exists, property values stop rising quickly. This makes it easier for newcomers to enter the property market, and for homeowners to buy and sell based on the desirability of housing.
It also means that investors make their profits from land not by pocketing its increase, but by improving its income value – collecting rent, increasing the quantity or quality of housing on it, pressuring government to allow better or more intensive use of the land.
When people can live fairly well, in large numbers, close to their places of work, the economy functions far better. When a few of us are making useless paper profits from our homes and the rest are stuck outside the market, it hurts everyone.