The Housing Affordability Crisis We Don't Want To Solve

The year is 1950, for the first time since the start of the industrial revolution, people are moving from cities to the suburbs, as they became known. The average house sold in the United States cost seven thousand four hundred dollars at a time when the average family income was two thousand nine hundred dollars per year, overwhelmingly earned by a single worker; It should be added that at this time the average house only reflected just over two-thirds of the average family income, so it was not unreasonable to expect that some people could afford these houses in a matter of years, but they did not, the interest rates were relatively low during this post-war period, so there wasn't much pressure to make extra payments and, furthermore,

housing

simply wasn't considered an important The average cost of a new car at the time was around two thousand. dollars, so if a family had two cars in their driveway, it wasn't that unusual for the cars to cost more than the house, especially in places like the Midwest where home prices were high. lower than the coastal states of course, two cars at the time was still a bit flexible so this situation wasn't the norm, but fast forward to today and it sounds almost totally ridiculous to imagine an average house in a nice suburb in the outskirts of chicago or seattle maybe even consider the same in vancouver sydney auckland or if you

want

to go really crazy in london unless those cars parked in the driveway are lambos you won't go near these two assets aligned on price and know What you might be thinking is that yes, house prices have become more expensive, tell us something we don't know and we understand, but this comparison could be more important than you think,

housing

affordability

has once again become A big problem in light of the pandemic driven by the need for more personal living space, helped by the convenience of working from home, people are once again moving from cities to the suburbs, driving up prices , but is all this for the better?

Well, the answer to that question is not as simple as you. would think and to answer it properly, we must first understand some important arguments: what drove up house prices before the pandemic, what has been driving up house prices during the pandemic, whether this price growth is really a bad thing, and Finally, what would be an ideal solution. Beyond all this, is there a market outcome that benefits everyone? This video was possible thanks to trends. As an economist, I like to stay up to date with the latest micro and macroeconomic changes, such as new and disruptive technologies, and that's what trends are really about.

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A big problem that cannot be overlooked in the United States, in particular, was the so-called era of white flight, the predominantly white middle class abandoned the inner cities in favor of the suburbs because they were seen as safer areas for live and by safer we mean whiter. We'll probably do a full video on this topic very soon because it's almost In any case, as fascinating as it is terribly wrong, this entire process was accelerated by a few key advances: the interstate highway system developed after World War II allowed People use their newly purchased automobiles to travel quickly and easily over long distances to their workplace each day. a day just a few decades earlier and getting out of the city and into the countryside would have involved taking a train if you were lucky or a horse-drawn carriage if you weren't, obviously not something that was feasible for most people's daily commute. people, this was the same everywhere in the Western world and other nations like Australia, Canada and even the United Kingdom did what they do best and followed the trends set by the United States of exchanging metropolitan houses for a one room block of acre and a white fence. an impact that would seem very strange to us today: it made housing more affordable two decades later, in 1970, the average household in the US was 17,000 inhabitants, which is, of course, more than in the years 50, but not much; kept pace with inflation during this period, on the contrary, the average salary at that time had almost tripled to 8,700 a year, which meant that the average house was less than twice the average family income and many people were buying houses that cost less than their annual income. salaries why good, because there was more supply the urban expansion had taken hold and houses were being built everywhere, what's more, the demand did not really come with it, the populations were two thirds of what they are today and the idea While investing in real estate wasn't exactly mainstream, cash rates were also as high as 13 during the '70s, which meant it was hard enough to maintain a mortgage on the house you lived in, let alone a property to invest in real estate, it was simply a commodity. wood, iron ore, orange juice or rice, it was something that people needed, it was something that people valued, but it was still something that was expected to be available at a reasonable price.

This all changed, although the 1980s was when real estate began to act less like a commodity and more like an investment vehicle. Some things changed in the 1980s, people once again began looking to return to the cities and proximity to city centers became a mark of prestige for certain suburbs, this was accelerated by a massive sale of defaulted real estate after the 1981 recession tempted people to take the leap and buy some liquidation properties as your first speculative real estate investment, all of this made easier with the widespread adoption of the Louis Renée mortgage bond. This was the start of a trend that saw house price growth become completely divorced from wage growth in three decades and the median home value in the US was more than four times the median wage and this The figure was taken from 2010, when house prices were recovering from subprime mortgages.

crisis

this was to be expected although it is simple supply and demand people demanded not only larger houses but also houses closer to city centers or other services this restricted supply the widespread adoption of 30-year mortgages lower interest rates income higher and The institutional push by the financial industry to grant more and more loans increased demand bada bing bada boom if you will now, it was obviously a little more complicated than that and in fact we have already made a whole video on the dynamics of the supply and demand of the real. real estate if you're interested in a more detailed analysis, but still this was actually because the best shelter is a pretty fundamental human right and in an advanced economy, I'm sure most of us would expect a shelter to be comfortable and sized adequate and not in a totally inappropriate place, skyrocketing prices threaten to put this basic right out of reach of most normal people in many cities around the world in my own backyard here in Sydney it was not unusual to see news of 10 students or more living in a two-bedroom apartment to share astronomical rental prices, across the pond in Auckland, average house prices rose more than 20 per cent last year, meaning even a young couple who earn average wages and somehow save 100 of their income for a deposit would actually be going backwards as the dream of home ownership recedes from them in a speculative flurry.

This is particularly strange considering this all occurred during a global pandemic. The two examples I gave were Sydney and Auckland along with other cities such as Vancouver, Toronto and to a lesser extent. To what extent London is particularly surprising given its historical dependence on foreign dollars, foreign direct investment has been a point of great controversy in these city centers, as foreign cash investors outnumber local residents in their respective real estate markets, although this obviously has not been the case. This has been possible with the world in lockdown, certainly not to the same extent, despite this, real estate markets in their cities and in most major urban centers in advanced nations, indeed around the world have shot in recent months.

Now you may think we already know the reason why. but there are actually about six different factors at play here. The first is, of course, low interest rates, which makes borrowing more money easier, which gives people more monetary power to carry out property sales negotiations, where they will normally compete with people who They can also borrow more money more easily, the second issue is more or less the same as the first, namely that the largest stimulus measures in history have sent a flood of money into the economic system and disproportionately into the hands of the richest people, who will be able to use this additional money. money as a down payment on a house this is not exclusive to the united states nor here in australia a controversial measure by the australian government allowed citizens to access their retirement retirement accounts the equivalent of an american 401k for up to 20,000 australian dollars that otherwise they would have been locked up until retirement, these withdrawals were intended to be used by struggling households who lost their jobs through no fault of their own to survive tough times, which is fair enough, but it was also used by a lot of people. to increase their savings on deposits, interestingly, in the months after this policy was implemented, the size of the average deposit needed for young Australians to buy their first home increased by twenty thousand dollars in major cities hmm, now points one and two actually say a There is a lot more to the decline in the value of currencies around the world than to the appreciation of property values.

Go and watch our video on hyperinflation to learn more about it. The third factor is that people are actually looking to spend more money on a house that they are trapped inside. for almost a year and a half now it means that people are very interested in having more square meters; This means that people who live in a one-bedroom apartment may

want

to look for an apartment where they have their own home office; people in a two-bedroom apartment. an apartment might want the outdoor space of a townhouse and people living in a townhouse might want to move into a completely detached house so they have space to hide from their family they're stuck with 24/7 of the week.

Across the property scale this is accelerated by factor four, which is that people are saving more money. One of the biggest obstacles to buying your first property or your first investment property or even moving to a larger family home is saving the money needed for the down payment. This obstacle is starting to be overcome by many households thanks to the savings rate highest the United States has seen in decades. Part of this is by choice. People are worried about the future and whether they will have a job once the government stimulus stops. I'm actually saving more money just in case, but a good portion of this saving is almost completely accidental.

Not being able to go on vacation or eat out or even spend a weekend wasting money at the mall has combined with some pretty generous stimulus measures to put a lot more money into people's savings accounts, this is money that a in turn can be used to offset those initial payments. The fifth factor is where this gets really strange and that is that people are afraid to sell. Conventional economic wisdom dictates it as price. of a good the increase is increasingly greater, more and more market participants will be willing to sell that good to satisfy the demand at that higher price.

The problem here is that housing is a necessity, as we have seen today, real estate blurs the line between ainvestment vehicle and a necessary commodity, both classifications tend to bias the results of our small, perfect economic assumptions about market behavior as a human need. Higher housing prices don't always force people to sell their homes because they will simply have to. buying again in the same market, competing in one of the most deteriorated rental markets in history or living on the streets, none of these options improve people's situation; What is more, this fear aggravates itself; there aren't many people selling, so people selling with the intention of buying a new home in the same market run the risk of not being able to find a suitable home quickly enough and then having the market appreciate quickly, meaning they need to buy a house that is worse or put themselves in danger. more debt to get back into a similar property, all of this means that people would prefer to postpone the sale and the cycle repeats itself.

This process is exacerbated when you consider the expenses involved in a home transaction. real estate agent commissions capital gains taxes sales taxes legal fees property appraisal fees moving house is an expensive affair and is not something people do unless there is a substantial benefit to doing it now, for example. Of course, there are people who own homes that they do not live in and instead keep them as investment properties. But even then, the decision to sell is not driven by typical market forces. Human emotions tend to motivate people to hold on to investments that are performing well or perhaps even double down on them.

Just look at the people flocking to buy meme stocks or cryptocurrencies if I want to see this counterintuitive market expectation in action, of course there will eventually be a limit, especially in local markets, if someone offered me 10 million dollars for me house tomorrow. I would take it in a heartbeat and go live on some remote island somewhere for the rest of my life, but that only makes sense because the value of the property gives me the wealth needed to get out of that market completely. Now, the sixth problem is something that is just starting to take effect and that is a serious shortage of construction materials, the slowdown of international supply chains and the closure of several industrial centers around the world has meant that things as Basics like wood for building frames have doubled in price, that is if you can get them.

There are reports of builders turning down jobs not because they are limited by labor but because they simply cannot get the supplies they need to complete the job. This threatens to further limit the supply for this type of housing. that people are chasing that also means that if a family was going back and forth between buying a house already established on the market, first building a house for themselves and actually increasing the housing supply, unfortunately that decision will be made for them in these Six factors mean that, despite all the turbulence in the global economy right now, house prices are continually rising, but maybe that could be for the best.

There seems to be no shortage of people complaining about expensive homes, although not as many have stopped to ask. If this is really a problem in most advanced economies in the world today, most people own homes, it stands to reason that the people who own these homes would want them to appreciate in value. This appreciation and value can be used for many different things. You can access this capital to finance construction or investment or maybe even pay for that jet ski, all of which adds to economic consumption. Appreciating property values ​​makes people feel richer and gives them a greater propensity to consume if you have a property you bought for half a million. dollars with a 400,000 loan that is then valued up to a million dollars, at the same time that you have paid your loan down to two hundred thousand dollars, you have effectively increased your net worth eight times simply by living in a house like the one you would have had anyway , this type of potential for massive profits is true for all investments made using leverage, but purchasing stocks with the same five-to-one leverage that is standard for a mortgage will typically attract higher interest rates on riskier contractual terms, such as margin calls, making them inappropriate.

For regular investors, what's more, you can't live on a five-to-one leveraged stock portfolio. This is also great because it's a really powerful retirement savings tool. The average person is pretty stupid financially speaking. Most people make little effort to save for retirement. Even if they are able to do so by owning a family home, simply paying off a mortgage over 30 years, people will accumulate equity in an asset that can be used in retirement in different ways, assuming their children move out, which it might not be like that. It is a fact that today they can sell it and downsize to a smaller property while maintaining the price difference to finance their retirement.

They can rent out the property and use this cash flow to rent a smaller place and fund their retirement, or of course they can move on. living in this paid home, meaning that any money they receive doesn't need to be diverted to pay for housing, which is a surprisingly large portion of most people's budget, this type of self-funded retirement will become increasingly important in the coming years. years, as the aging of the population places a greater burden on state-funded retirement systems, such as pensions, now the other argument is more philosophical than purely economic, but in a democratic country where the majority of the population voter has a vested interest in an asset. class appreciating its value, is it really fair for a government to take political measures to stifle that growth again?

It's not a purely economic argument, so I don't want to tell you what's right or wrong, but let me know what you think in the comments section. Next, the counterargument to all of this is basically everything we explored in our last video on the real estate market again. Go and watch that video after this one if you're interested because I don't want to repeat too much and This video is going to go on for half an hour because that would take away from what everyone's been waiting for, which is the solution. Okay, so everyone has their own opinion on what the solution to the housing

affordability

crisis

is, but before any of that can.

To even consider it we need to know what we're aiming for, we certainly don't want prices to crash which causes a lot of problems with people being underwater with their home loans and all the other unpleasant things we saw in 2008 but probably won't. let's do. We don't want houses to become unaffordable for all but the richest among us, and if they continue to grow like they have over the last decade, that's where we're going to end up, maybe the best solution is for them to do nothing at all. absolute. Think of it as if wheat is a commodity that provides us with value by being baked into bread, pasta, pizza or whatever people can speculate on it, and indeed they do in commodity markets, but ultimately Ultimately, no one holds on to wheat long term in the hope that in fact, if the value of wheat quadrupled, we would probably view it as a market failure because suddenly all of our food would be much more expensive.

Real estate is also a commodity that provides us value by giving us a place to live or work or farm maybe grow some wheat, I guess anyway maybe we should start looking at appreciating property values. In the same way that we would see the appreciation of other commodities, which is a bad thing, this has many advantages. For starters, people trying to get into the real estate market don't have a moving target where they need to save more money just to keep up. It also doesn't stop people from building wealth by paying off their mortgages or even investing in rental properties because these will continue to provide more stable cash flows.

Price appreciation also tends to mean that depreciation will be less severe during economic downturns, meaning there is less chance of people ending up with properties that are worth less than their mortgage. Furthermore, prices are stable. It means that capital gains taxes are avoided where applicable for people looking to exchange their homes, which in turn means that people will be more willing to move between their homes as their families grow and shrink over time. throughout his life. Now you would think that all these advantages come at the expense of the poor homeowners, I know, don't cry too much, but that's only half of the real real estate investors who do nothing but sit on the property and wait for their property to appreciate. value, well, yes, they are going to lose, but no matter what. that money will go to productive capital, instead the economy will be better off for it, the money will flow to investors who add value to the market just as it does with normal raw materials, if you convert iron ore into steel in a way efficient, you make profit from the value you Added: If you bake wheat into bread, you make profit from the value you added and if you turn a dilapidated house into a block of units, you make profit from the value you created by giving people a place to live that I didn't have before.

This hypothesis is basically the reality in Japan, where housing prices have barely moved over the last decade. Is this the ideal? Well, it might be difficult to convince most homeowners that it is, but it's certainly not something that should be completely ignored, especially when the alternative is a future where people consider themselves lucky to have to be burdened with an almost unpayable debt for most of your working life simply to have a place to call home. Still, this is unlikely to be considered in the next few years, but if the idea gains traction, you'll probably hear about it first with trends.

Trends give you important information about emerging industries so you can take advantage of them long before they become in a big problem, for example, consider the zoom app market in July 2020 trends began Writing about zoom apps and how it was obvious that the zoom ecosystem presented a billion opportunities earlier this month and zoom just announced that they will be launching a 100 million venture fund to invest in zoom apps in September 2020, the trends team also wrote about the rise of self-storage and experts who are buying a ton of shares in companies like public storage , trend analysts dug into Public Storage's acquisition strategy and made a compelling case for why the company was perhaps undervalued in another, I told you, at that time Public Storage stock is up more than 30 since trends began to write about him.

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