Or to put it another way, why didnt it happen 20 years ago or 50 years ago or 100 years ago? It seems like the underlying reasons for property being so expensive have been around, well, forever? Landlords accumulate wealth, buy property, use property to generate more wealth, property stock declines and property prices go up? I realise thats a 5 year old’s view of capitolism but i dont have any background in economics. Id love to have it explained in more detail
In: Economics
Most housing crises are caused by a “bubble bursting”. In the late 90s and early 00s there was this thing called sub-prime lending that created a huge unsustainable amount of housing being purchased all over the place. The interest rates were variable with the assumption that incomes would keep going up and borrowers would be able to afford much higher payments ten years down the line. The idea of a “future me problem” is very appealing to human nature and ironically the housing situation was largely responsible for the economy ceasing to expand. People couldn’t afford the balloon payments and the bubble popped.
This time around the “bubble” was a much more dramatic result of economic forces that emerged during the pandemic. There was a dramatic redistribution of wealth that predictably caused a lot of people to think that they should invest in real estate. That sudden enormous desire to invest caused prices to go through the roof, well above what property was objectively worth but people still “bought” (mortgaged) it. Then that burst of post-pandemic capital dried up, people are stuck with properties they can’t afford but still owe so much that they can’t sell them either and other vacant properties values are based on what the properties around them have recently sold for – and don’t even get me started on property taxes.
There have been affordability crises in the past. In the 70s-80s interest rates were above 10%, and housing affordability was very low. The difference was that homes were smaller and young people planned to buy several homes over time so they were willing to buy a “starter house” with very few features.
When nobody wants to buy what’s cheap to build, all builders build expensive houses.
Wealth concentration. As more wealth flows into fewer hands worldwide, it has to be invested somewhere. Investing in single-family homes is not a terrible idea until multiple billionaires around the world decide to jump into that market all at once.
There are many reasons and I will add just some to the mix now.
One is buying property as investment. It never happened before in this volume that the wealthy previous generation bought places. These places are either just stay empty or exit the housing market and enter the hotel market (think Airbnb). Either way , it’s not available.
Also, in many countries there’s a further concentration of the cities, so people basically want to leave villages and try to move to cities. Technically these ghost villages have a lot of houses just nobody wants them. So practically as if they were non-existent but for each abandoned house, you need another one in the city.
There is also a lot of rehabilitation programs of rust areas especially in Europe where very old, bad, moldy (but therefore cheap) houses are demolished and replaced by new, shiny usually bigger apartments. In a way it’s of course good that people don’t have to live in moldy, hardly liveable places, but they didn’t choose that for fun, that was what they can afford. So for every such rehabilitation program, you create people who need to move to cheap outskirt areas but then you create a competition between them and the young ex-village people who just wanted to set foot in the city and were happy with the outskirts.
On top of that, building a cheap apartment is almost as expensive as building a mid or high end apartment. The structure costs the same, the time and labor is the same, the only difference is that you use expensive tiles and luxury taps and shit. This is a small extra cost compared to a total but you can sell at a higher margin. So developers are incentiveized to build high end apartments because the return on investment is much better.
So if you put it all together and surely things that others will add, almost every trend in the equation point towards crisis.
What you are seeing in house price increase is actually a reflection on the increase in money supply. Houses have held (with a bit of speculative increase) their value relative to the supply of money.
Houses are kinda the same price, your money is just worth less.
So there are a few factors at play:
– Population growth in major cities creates greater demand. As cities grow bigger, more of a premium for land/homes closer to the center as commute times grow. You can’t create new land.
– 2008 Financial crisis caused by real estate bubble burst. This created drop in real estate values, foreclosures flooding the market, inability to finance additional real estate construction, etc. so there was a substantial reduction in new building for years after.
– COVID shook up real estate markets, as people wanted more space due to work from home, remote school, space to do more at home, etc. So the market was flooded with buyers at one time, as people who’d thought about buying or about upgrading at some point in next few years changed plans and looked to buy at once.
– At same time, potential sellers of family-sized homes in many places stayed put. Seniors didn’t want strangers bringing COVID into their homes, they didn’t want to travel to Florida or Arizona to hunt for retirement home, maybe adult kids moved back in to ride out the pandemic. Not sure how much this was US specific, or also experienced more broadly in other counties.
– But imbalance between buyers and sellers caused prices to skyrocket. Super low interest rates fueled it even further, as a buyer able to get a 3% mortgage can afford significantly more than one with a 5% mortgage and still hit same monthly mortgage payment.
– New construction couldn’t happen with any big increase, despite demand, because of raw material and component shortages/costs skyrocketing, labor shortages, delays on permitting and inspections.
– Then interest rates doubled almost overnight. All those homeowners who bought with a 3% loan or refinanced into a 3% loan were not going to move if they didn’t absolutely have to. Even buying a home with same price as one being sold could mean a significant increase in mortgage payment. So unless somebody has to relocate for a job, had twins and lives in a tiny condo, or somebody died, homes aren’t hitting the market. Even as lower interest rates have cut demand some and have cut buyers’ buying power, the supply has fallen even more so the supply/demand is still imbalanced with too little supply.
The world has never been more economically connected than it is now. Mobility of money and people puts pretty much every city of marginally good economic standing in play for the global upper class. Secondarily there is a surge in growth in the global middle class outside of North America and Western Europe.
Passive investment in the stock markets via ETFs and Mutual funds has made the markets historically less volatile so the investment firms have moved a lot of capital into residential real estate.
If you look in those affected countries younwill find in almost all of them also affordable or even cheap houses. The problem is those houses are ‘in the middle of nowhere’ or at least not in areas with lots of desirable jobs.
So what we’ve been seeing the past few decades is economic concentraion into a few big cities. With that movement of jobs sobdoes everyone eant to live in those few cities. But with a more limited area and housing supply prices go up.
The short answer: in the US we stopped building new homes in the Great Recession and we haven’t caught up on the huge shortage since then.
New single family home construction in the US by decade:
* 1960s: 9.3 million starts
* 1970s: 11.4 million starts
* 1980s: 9.9 million starts
* 1990s: 11.0 million starts
* 2000s: 12.3 million starts
* 2010s: 6.8 million starts
If you adjust this for population growth it looks even worse. Full stats: https://eyeonhousing.org/2020/01/a-decade-of-home-building-the-long-recovery-of-the-2010s/
Every decade from 1960s-2000s the US built >2x homes per capita compared to 2010s.
Note that this has **not** happened in all developed countries. The details are very regionally specific. In Japan, for instance, housing is generally affordable (much cheaper in Tokyo than in NYC, for example).
There are major housing shortages in several English speaking countries, which have similar legal and cultural trends. Again the details differ, but the general summary:
* Tons of homebuilders went bankrupt in the Great Recession of 2008 and housing market crash. Even those that remained basically stopped building for a decade. The slow recovery led to a “lost decade” where homes were built at half the rate in the 2010s compared to earlier decades. This was a global phenomenon.
* English speaking countries have similar zoning laws that make it difficult and expensive to build new homes. These were passed in the 50s during White flight as folks left cities for suburbs and passed laws to stop poor people or people of color from following.
* Even in recent decades cities were still below their peak population, so they had spare housing as people moved back to the city. (Somerville, MA in the Boston metro is still below its peak population from *1940*.)
* More people live alone. Households are smaller. So the same population today demands ~2x as many homes as 100 years ago. And population has also grown, of course.
* Major metros hit limits on how far you can build single family suburbs and exurbs. The longer the commute, the worse car traffic gets.
Why not 100 years ago? Zoning laws hadn’t been invented yet. If you wanted to build a duplex, nobody would stop you. Lots of vacant land even in major metros.
Why not 50 years ago? Cities had emptied out, suburbs still had room for more single family homes despite restrictive zoning. Lots of vacant buildings in major cities.
Fast forward to today: zoning rules start to really hurt as suburbs are “full” and make it illegal to build denser apartments. More people live alone and not in multi-generational households.
Folks like to blame Airbnb and private equity as boogeymen, but the true story is that normal John and Jane Doe homeowners own most of the houses and pass local laws making it hard to build new homes.
I’m pretty sure there is no property crisis.
One of the supposedly worse-off countries in that regard is the Netherlands, but the homeownership rate is 70%. In 2005 it was 63%, so it’s gotten better if anything.
When I was growing up, no one panicked that they couldn’t afford a home. Renting was completely fine and people had no issues with that, nowadays people are obsessed with owning the property for some reason.
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