I literally canceled my Economist subscription two weeks ago. They must’ve seen that and published this just for me. The Housing Special Report in this week’s paper is a total knockout. Go find yourself a print copy.
The soaring cost of housing has created gaping inequalities and inflamed both generational and geographical divides. In 1990 a generation of baby-boomers, with a median age of 35, owned a third of America’s real estate by value. In 2019 a similarly sized cohort of millennials, aged 31, owned just 4%.
Home ownership is the West’s biggest economic-policy mistake
Over the past 70 years housing has undergone a remarkable transformation. Until the mid-20th century house prices across the rich world were fairly stable (see chart). From then on, however, they boomed both relative to the price of other goods and services and relative to incomes. Rents went up, too. The Joint Centre for Housing Studies of Harvard University finds that the median American rent payment rose 61% in real terms between 1960 and 2016 while the median renter’s income grew by 5%.
How housing became the world’s biggest asset class
Broadly speaking, three types of planning systems exist across the rich world: discretion-based; autocratic; and rules-based. The first type is commonly found in Commonwealth countries. Local residents have plenty of power to stop development plans, and they frequently do. It may be no coincidence that those countries have in recent decades seen the fastest growth in house prices, says Paul Cheshire of the London School of Economics. Parts of America follow similar rules. In San Francisco every permit is appealable and, since very few large-scale projects match existing building and planning codes, delays are common.
Autocratic planning systems do a better job of boosting housing supply. Russia has raised its annual rate of housebuilding from 400,000 a year in the early 2000s to over 1m. Singaporeans who protest against development are routinely ignored, says one with a house located near Tengah forest, some of which will soon be razed to make way for apartment blocks.
The third group—rules-based planning systems—are commonly found in European countries such as France and Germany. If developers tick all the boxes then construction is permitted, even if local residents object. These systems have generally done a better job of delivering housing. Since the 1950s Germany has built twice the number of houses as Britain, despite having only a slightly higher population.
Politicians are finally doing something about housing shortages
America has some of the most generous fiscal incentives to become a home-owner. Official estimates suggest that the government forgoes over $200bn a year (over 1% of GDP) subsidizing homeowners through the tax code, with policies including a tax deduction on mortgage interest and not taxing the income homeowners implicitly earn by avoid paying rent.
Home ownership is in decline
More radical reforms could be considered. German mortgage-lenders embrace an unusual appraisal technique. When assessing the value of a house, they rarely refer to the market price; instead, they consider “mortgage-lending value”, an assessment of the probable price of a house over the economic cycle. A report from the Bank for International Settlements, a club of central banks, suggests that by discounting short-term price fluctuations, this valuation technique can stop bubbles from forming.
What is the future of the rich world’s housing markets?