Do We Actually Want Affordable Housing? | 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 out of the cities and into the suburbs as they came to be known the median home sold in the united states cost seven thousand four hundred dollars in a time where the median household income was two thousand nine hundred dollars per year overwhelmingly earned by a single worker it should be added at this time an average house only reflected just over two-thirds the average household income therefore it was not unreasonable to expect that some people could pay these homes off within a matter of years but they didn't interest rates were relatively low during this post-war period so there wasn't much pressure to make extra repayments and more so than that housing just wasn't seen as a major expense the average cost of a new car at this time was around two thousand dollars so if a family had two cars in their driveway it was not that uncommon for the cars to cost more than the house especially in places like the midwest where home prices were lower than the coastal states of course two cars at this time was still a bit of a flex so this situation wasn't the norm but fast forward to today and it sounds almost totally ludicrous picture an average home in a nice suburb on the outskirts of chicago or seattle maybe even consider the same in vancouver sydney auckland or if you want to get really crazy london unless those cars parked in the driveway are lambos you're not getting anywhere close to these two assets lining up on price and i know what you might be thinking yeah house prices have become more expensive tell us something we don't know and i get it but this comparison might be more important than you think housing affordability has once again become a huge issue in the light of the pandemic spurred on by the need for more personal living space aided by the convenience of working from home people are once again moving out of the cities and into the burbs driving up prices but is this all for the best well the answer to that question is not as simple as you would think and to properly answer it we must first understand a few important arguments what was driving up house prices before the pandemic what has been driving up house prices during the pandemic is this price growth actually a bad thing and finally what would be an ideal solution to all of this is there a market outcome that benefits everybody this video was made possible by trends as an economist i like to stay up to date with the latest micro and macro economic changes like new and disruptive technologies and that's really what trends is all about trends employs a team of analysts who send you data about things that need to be on your radar like 3d printing emerging marketplaces like the work from home economy and much more stay tuned until the end to learn more or try it right now for an entire week or for just one dollar by going to trends.co ee if you don't find your million dollar idea by day six you can cancel your subscription worry free link is in the video description below now if we go back in time to the 1950s again we will see that there was a few things that pushed people out of living in city centers where they were predominantly renters and into the suburbs where they were predominantly homeowners a big issue that can't be overlooked in the united states particularly was the so-called era of white flight the predominantly white middle class abandoned inner cities in favor of suburbs because they were seen as safer areas to live in and by safer well we mean more white we will probably make an entire video on this subject very soon because it's almost as fascinating as it was terribly misguided either way this whole process was accelerated by a few key developments the interstate highway system developed after world war ii allowed people to use their new acquired cars to commute quickly and easily over great distances into their place of work every day just a few decades prior and getting out of the city and into the country would have involved catching 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 this was the same everywhere in the western world and other nations like australia canada and even the uk did what they do best and followed the trends set down by the united states to trade in metropolitan townhouses for a quarter acre block and a white picket fence this all had an impact that would seem very strange to us today it made housing more affordable two decades later in 1970 the average home in the us was 17 000 which is of course more than what it was in the 50s but not by much in fact it only really kept up with inflation during this period for contrast the median salary at this time had almost tripled to 8 700 a year which meant that the average house was less than two times the average household income and many people were buying houses that cost less than their annual salaries why well because there was more supply urban sprawl had taken hold and houses were being popped up everywhere what's more is that the demand didn't really come along with it populations were two-thirds of what they are today and the idea of 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 home that you lived in let alone a property to invest in real estate was simply a commodity it was lumber iron ore orange juice or rice it was something that people needed it was something that people valued but still something that was expected to be available for a reasonable price this all turned around though in the 1980s this was when real estate started acting less like a commodity and more like an investment vehicle a few things changed in the 1980s people once again started looking to move back into the cities and proximity to city centers became a mark of prestige for certain suburbs this was accelerated by a massive defaulted real estate sell-off following the recession of 1981 tempting people to make the leap into buying up some fire sale properties as their first speculative investment into real estate all of this was made easier with the widespread adoption of louis renee's mortgage bond this was the start of a trend that saw house price growth completely divorce itself from wage growth fast forward three decades and the median home value in the usa was more than four times the average salary and this figure was taken from 2010 mind you back when home prices were recovering from the sub-prime mortgage crisis this was all sort of to be expected though it's simple supply and demand people were demanding not only larger homes but homes that were closer to city centres or other amenities this restricted supply the widespread adoption of 30-year mortgages lower interest rates higher incomes and the institutional push by the finance industry to write more and more loans increased the demand bada bing bada boom if you will now it was obviously a little bit more complicated than that and we actually have already made an entire video on the supply demand dynamic of real estate if you're interested in a more detailed analysis but even still was this actually for the best shelter is a pretty fundamental human right and in an advanced economy i'm sure most of us would expect that shelter is comfortable adequate in size and not in a totally unsuitable location skyrocketing prices are threatening to push this basic right outside the reach of most normal people in a lot of cities around the world in my own backyard here in sydney it was not uncommon to see news stories of 10 students or more living in a two-bedroom apartment to share in astronomical rental prices likewise just across the pond in auckland average house prices rose by over 20 percent just last year meaning that even a young couple earning average salaries and somehow saving 100 of their income towards a deposit would actually be going backwards as the dream of home ownership speeds away from them in a speculative flurry this is particularly bizarre considering that this all came during a global pandemic the two examples i gave of sydney and auckland alongside other cities like vancouver toronto and to a lesser extent london are particularly surprising considering their historic dependence on foreign dollars foreign direct investment has been a point of major contention in these city centers as cashed up investors from abroad out-compete local residents in their respective housing markets the thing is though this has obviously not been possible with the world in lockdown certainly not to the same extent despite this the property markets in their cities and most major city centres in advanced nations for that matter around the world have skyrocketed in recent months now you may think we already know the reason why but there is actually about six different factors at play here the first is of course low interest rates this makes borrowing more money easier which gives people more monetary firepower to take to property sale negotiations where they will normally be competing with people who are also able to borrow more money more easily the second issue is somewhat the same as the first which is that the largest stimulus measures in history have sent a wash of money into the economic system and disproportionately into the hands of wealthier people who will be able to use this extra money as a down payment on a house this is not exclusive to the united states either here in australia a controversial move by the australian government allowed citizens to access their superannuation retirement accounts the equivalent of an american 401k for up to 20 000 australian dollars that otherwise would have been locked away until well retirement these withdrawals were meant to be used by struggling households who lost their jobs through no fault of their own to survive through tough times which is you know what fair enough but it was also used by a lot of people to boost their deposit savings curiously enough in the months following the roll out of this policy the size of the average deposit needed for young australians to purchase their first home increased by twenty thousand dollars in the major cities hmm now points one and two actually say a lot more about the declining value of currencies across the world more so than the appreciating value of property go and watch our video on hyperinflation to learn more about that the third factor is that people are genuinely looking to spend more money on a house being stuck inside for close on a year and a half now means that people are really keen for some extra square footage this means that people in a one-bedroom apartment might want to look into an apartment where they have their own home office people in a two-bedroom apartment might want the outdoor space of a townhouse and people living in a townhouse might want to move into a full-on freestanding home so they have space to hide from their family of whom they are stuck with 24 7. everyone trading up puts more demand on the entire property ladder this is accelerated by factor four which is that people are saving more money one of the biggest hurdles to buying your first property or your first investment property or even moving up to a larger family home is saving the money needed for the down payment this hurdle is starting to be overcome by a lot of households thanks to the highest savings rate the usa has seen in decades part of this is by choice people are worried about the future and whether they will have a job once government stimulus stops so i'm actually saving more money just in case but a good portion of this saving is almost entirely accidental not being able to go on holidays 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 savings accounts this is money which can in turn be used to make up those down payments the fifth factor is where this gets really weird and that is that people are scared to sell conventional economic wisdom dictates that as the price of a good rise is higher and higher more and more market participants will be willing to sell that good to satiate the demand at that higher price the problem here is that housing is a necessity as we've seen real estate today blurs the line between an investment vehicle and a basic necessary commodity both of these classifications tend to skew the results of our perfect little economic assumptions about market behaviour as a human necessity higher house prices don't always compel people to sell their homes because they're just gonna have to buy back into the same market compete in one of the most broken rental markets in history or live on the streets none of these options make the people any better off what's more is that this fear compounds on itself not many people are selling so the people that do sell with the intention to buy 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 rapidly meaning that they need to purchase a home that is worse or put themselves into more debt to get back into a similar property this all means that people would rather hold off on selling and the cycle repeats itself this process is exacerbated when you consider the expenses involved in transacting a home real estate agent commissions capital gains taxes sales taxes legal fees property evaluation fees removalists moving house is an expensive affair and not something that people do unless there is a substantial benefit to doing so now of course there are people that own homes that they don't live in and instead hold on to them as investment properties but even then the decision to sell is not one driven by typical market forces human emotions tend to motivate people to hold on to investments that are doing well or perhaps even double down on them just look at people flocked to buy meme stocks or cryptocurrencies if you want to see this counter-intuitive market expectation in action of course there is eventually a limit especially in local markets if someone offered me 10 million dollars for my house tomorrow i would take it in a heartbeat and go and 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 wealth required to exit that market entirely now the sixth issue is something that is only just starting to take effect and that is a serious shortage in building supplies the slowdown of international supply chains and the closure of various industrial centers across the world has meant that things as basic as lumber to build frames with have doubled in price this is if you can get them at all there are reports of builders turning down jobs not because they are limited by manpower but because they simply can't get the supplies that they need to complete the job this is threatening to further constrain supply for the types of homes that people are going after it also means that if a family was tossing up between buying an already established home off the market first building a home for themselves and actually adding to the supply of housing well unfortunately that decision is going to get made for them these six factors mean that despite all the turbulence in the global economy at the moment house prices are continually creeping up but perhaps that might actually be for the best there looks to be no shortage of people complaining about expensive housing however not as many have stopped to ask if this is actually a problem in most advanced economies in the world today a majority of people are homeowners it stands to reason that the people that own these homes want them to appreciate in value right this appreciation and value can be used for many different things people can access this equity to fund construction or investment or pay maybe even that jet ski all of which adds to economic consumption appreciating property values make people feel richer and give them a higher propensity to consume if you have a property that you bought for half a million dollars with a 400 000 loan which then appreciates to a million dollars in the same time that you have paid your loan down to two hundred thousand dollars you have effectively increased your net worth eight times over simply by living in a house like you would have had to anyway this kind of potential for massive gains is true of all investments made using leverage but buying stocks with the same five to one leverage that is standard for a mortgage will normally attract higher interest rates in riskier contract terms like margin calls which makes them unsuitable for regular investors what's more is that you can't live in a five to one leverage stock portfolio this is also fantastic because it is a really powerful retirement saving tool the average person is pretty dumb financially speaking most people make little effort to save for retirement even if they are able to at all by owning a family home however simply by paying off a mortgage over 30 years people will build equity in an asset that can be used in retirement in a few different ways assuming that their kids move out which might not be a given these days they can sell it and downsize into a smaller property keeping the difference in price to fund their retirement they can rent the property out and use this cash flow to rent a smaller place and fund their retirement or of course they can continue to live in this paid off home which means that whatever money they do have coming in does not need to be diverted into paying for housing which is a surprisingly large portion of most people's budgets this kind of self-funded retirement will be more and more important in coming years as aging populations put a larger burden on state-funded retirement systems like pensions now the other argument is philosophical more so than it is purely economical but in a democratic country where the majority of the voting population has a vested interest in an asset class appreciating in value is it really fair that a government would take policy steps towards stifling that growth again not a purely economic argument so i don't want to tell you what's right or wrong but let me know what your thoughts are in the comments section below now the counter argument to all of this is basically everything that 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 have this video drag on for half an hour because that would take away from what you've all been waiting for which is the solution okay so everyone has their own opinion as to what the solution to the housing affordability crisis is but before any of that can even be considered we need to know what we're aiming for certainly we don't want prices to crash that causes a lot of issues with people being underwater on their home loans and all of the other nastiness we saw in 2008 but we probably don't want houses to become unaffordable to all but the wealthiest among us either and if they keep growing like they have been in the past decade well that's where we're going to end up perhaps the best solution is for them to do nothing at all think of it like this wheat is a commodity it provides us value by being baked into bread or pasta or pizza or whatever people can speculate on it and indeed they do in commodities markets but ultimately nobody holds on to wheat long term in the hope that it will quadruple in value over the next decade in fact if wheat did quadruple in value we would probably see that as a market failure because suddenly all of our food would be much more expensive real estate is also a commodity it provides us with value by giving us a place to live or work or farm maybe farm some wheat i guess anyway perhaps we should start seeing the appreciation of property values the same way that we would see the appreciation of other commodities which is kind of a bad thing this has a lot of advantages for starters people trying to break into the property market don't have a moving target where they need to save more money just to keep up it also doesn't stop people building wealth by paying off their mortgages or even by investing into rental properties because these will still provide cash flows more stable price appreciation tends to also mean that depreciation will be less severe during economic downturns which means that there is less of a chance for people to end up with properties worth less than their mortgage what's more is that stable pricing means that you avoid capital gains taxes where applicable for people looking to trade in their homes which in turn means that people will be more willing to move between their homes as their families grow and shrink over their life now you might think all of these advantages come at the expense of the poor poor landlords i know don't cry too hard but that's only half true property investors that do nothing but sit on property and wait for it to appreciate in value well yeah they're gonna lose out but whatever go put that money towards productive capital instead the economy will be better off for it instead money will flow to investors that add value to the market just like it does with regular commodities if you turn iron ore into steel efficiently you get the profit off the value that you added if you bake wheat into bread you get to profit off the value that you added and if you turn a dilapidated house into a block of units you get to profit off the value that you created by giving people a place to live that did not previously exist this hypothetical is basically the reality in japan where house prices have barely moved over the past decade is this the ideal well it might be hard to convince the home owning majority that it is but it's certainly not something that should be completely disregarded especially when the alternative is a future where people consider themselves lucky to be burdened by an almost unserviceable debt from a majority of their working lives simply to have a place to call home even still this is unlikely to even be considered in the coming years but if the idea of it does gain traction you would likely hear about it first with trends trends provides you with important insights into emerging industries so that you can take advantage of them long before they become a big deal for example consider the zoom app marketplace in july of 2020 trends began writing about zoom apps and how it was obvious that the zoom ecosystem presented a billion opportunity fast forward to earlier this month and zoom just announced that they will be launching a 100 million venture fund to invest in zoom apps in september of 2020 the trends team also wrote about the rise of self self-storage and insiders who are buying up a ton of shares in companies like public storage the analysts at trends did a deep dive into public storage's acquisition strategy and made a convincing case for why the company was perhaps undervalued in yet another i told you so kind of moment public storage's stock is up over 30 since trends began writing about it check out the link in the video description below to learn more about why over 16 000 entrepreneurs and investors love trends and its community and because you're a fan of the show you can try it out for an entire week for just one dollar by going to trends.co e e again that's trends.co ee thanks for watching mate bye

Channel: Economics Explained

Views: 2,106,371

Keywords: housing, Inflation, hyperinflation, housing market, housing market inflation, real estate, real estate inflation, how to profit from inflation, inflation rate, rate of inflation, housing boom, housing market crash, home price surge, house prices inflation, why are home prices going up, why is housing getting more expensive, why is rent increasing, inflation explained, economics, economics explained, housing crisis, housing affordability, housing bubble, housing shortage

Id: nUFZ1_fC3Kw

Length: 23min 25sec (1405 seconds)

Published: Thu May 06 2021

Reddit Comments

[u/moto123456789]

Long video but I think it does a nice job talking about the fundamental problems of treating housing as a commodity that people gain most from speculating on.

[u/TheUrbanDoctor]

I really wish that owning a single-family home wasn't such a great way to growth one's wealth.... *sigh*

[u/ColdEvenKeeled]

I have lived in cities where housing mortgages were a) only about 3 X a yearly salary (not 11) and b) monthly mortgage payments were less than renting anything equivalent. Common theme? Plenty of housing supply....which meant....lots of sprawl.