In the end, it all comes down to being able to afford a home

When growing numbers of people can’t get a foot on the property ladder, society starts to fall apart

Photo by Jocke Wulcan on Unsplash

The home is the foundation of sanity and sobriety; it is the indispensable condition of continuity, its health determines the health of society as a whole… The material home represents the concrete expression of the habits of frugality and saving "for a home of our own". Your advanced socialist may rave against private property even while he acquires it; but one of the best instincts in us is that which induces us to have one little piece of earth with a house and a garden which is ours; to which we can withdraw, in which we can be among our friends, into which no stranger may come against our will… National patriotism, in other words, inevitably springs from the instinct to defend and preserve our own homes.
Sir Robert Menzies, Australia’s longest-serving Prime Minister  

Try listing every problem the Western world has at the moment. Along with Covid, you might include slow growth, climate change, poor health, financial instability, economic inequality, and falling fertility. These longer-term trends contribute to a sense of malaise that many of us feel about our societies. They may seem loosely related, but there is one big thing that makes them all worse. That thing is a shortage of housing: too few homes being built where people want to live. And if we fix those shortages, we will help to solve many of the other, seemingly unrelated problems that we face as well.
Sam Bowman, John Meyers and Ben Southwood

The Queensland government charged me 2.25 per cent land tax, so I’m paying nearly $7000 a property per year in land tax.
‘David’, the owner of 283 investment properties, venting on talkback radio about the heartbreaking challenges facing Australia’s 2.2 million landlords

I’m a Gen Xer who has lived in Sydney (long one of the world’s most expensive property markets) for almost five decades and cycled between being a homeowner and renter over the last two decades. So, I’ve long had both an immediate and academic interest in house prices.

Bowman, Meyers and Southwood, quoted above, said just about everything that needed to be said about the causes and effects of unaffordable housing a year ago in their much referenced and amusingly titled thinkpiece, ‘The housing theory of everything’. I’d highly recommend you read it as soon as you’ve got 20 minutes free, but the TL;DR version is as follows.

The price of many things, notably consumer goods, has trended down in recent decades. In stark contrast, the price of housing, especially in those places where people want to live for employment and other reasons, has skyrocketed. The money quote:

The most dramatic evidence of housing scarcity can be seen in price rises over the past forty years. Average New York City metropolitan area house prices are up 706% since 1980 (or 376% more than US consumer prices, and 326% more than US wages). For San Francisco the rise is 932%. London house prices are up over 2,100% in that period (or around 1,500% more than wages). Prices in Sydney, Australia, have risen by 1,450% (compared to hourly wage increases of 480%). In Ireland, prices have risen by about 800% in that period, driven by rises in Dublin in particular. Rents show similar, but less extreme, trends.

The obvious effect of high housing costs is that people have a lot less money to spend or invest on other things. But Bowman et al point out sky-high property prices also have plenty of not-so-immediately-obvious adverse effects, such as:

Lower productivity: “When housing is scarce in high-productivity areas, some people are priced out of the area altogether, so they can’t move within range of better jobs. This means that many people are working in less productive jobs than they could if it was easier for them to move to more productive places.” 

Less innovation: “Nearly all innovation happens, and has always happened, in cities… [that] allow innovators to collaborate to come up with new ways of doing things.”       

More regional inequality: “Where previously people of all income and skill levels would move to more prosperous places, now only well-paid ones at the top do, leaving behind many who are not so lucky in places with a surplus of labour.”

Greater overall inequality: “The aggregate, countrywide effect of housing being so limited in supply has been that economic growth in most Western countries has accrued more and more to landowners and less to everyone else.”

Political conflict: “Elections in the English-speaking world are increasingly becoming divided between relatively prosperous and well-educated citizens of cities and their suburbs on one side and people in the rest of the country – rural areas and economically depressed towns – who resent the perception that the system is rigged in favour of the already well-off.”

Generational strife: “Many young people have had to delay forming families and often take poorly paid, insecure jobs that can barely cover rent and living costs as the price for living in culturally attractive cities. They see opportunity as limited and growth as barely perceptible. Meanwhile, older generations sit on housing property worth many times what they paid and, stuck in a zero-sum mindset, often prioritise the protection of their own neighbourhoods over the need to build more homes. Can you blame young people who resent older people, and the West’s economic system itself, when this is what it offers them?”

Population extinction: “The price of housing does not just affect the places where people live; it determines the kinds of homes they live in as well. And that has a huge influence on people’s family lives, affecting both when people have kids and how many kids they have.”

Despite no longer being one of the “young people”, I’m no slouch myself when it comes to resenting older people and questioning the West’s economic system. I suspect I’d be less enraged by both boomers and neoliberals if, like my father, I’d paid off a spacious suburban house on a quarter-acre block in a good neighbourhood by the age of 50.

The shifting politics of homeownership

I’ve previously avoided writing about the housing issue in this space because I felt I didn’t have anything to offer other than the counsel of despair. But, for the first time in my adult life, I’ve begun to hope that the situation might just turn around.

As John Howard was fond of observing, much of politics comes down to arithmetic. Post-WWII, any government seen to be putting even the lightest of thumbs on the scale for aspiring homeowners at the expense of actual homeowners risked paying a heavy political price given voters in the latter category significantly outnumbered voters in the former one.

This is why governments under pressure to ‘do something about the lack of affordable housing’ have reliably implemented measures that appear to assist aspiring homeowners but which ultimately benefit existing ones. For instance, sling first homebuyers a $20,000 grant and they will feel grateful. But all that’s likely to happen is that average house prices will soon rise by $20,000.

In regards to what our American friends call third rails, nothing has proven to be more of an electrified railway track than arrangements that favour those who own one or more properties. (One of the main factors contributing to Bill Shorten losing the unlosable election in 2019 was his determination to modestly reign in Australians' ability to negatively gear their investment properties.)

Economist Dr Cameron K. Murray has an informative blog post on this topic that includes the following graph.  

In relation to the skyrocketing rates of home ownership that occurred during the Menzies era, Murray notes that “the market did not do this” because a right-of-centre government engaged in “heavy-handed government intervention in the housing market, including

·                rent controls that persisted post-war and incentivised landlords to sell,

·                public finance for first home buyers building new homes,

·                large scale public housing with tenant purchase programs”

Of course, it’s been many years since even left-of-centre governments were willing to spend up big on building public housing, let alone introduce rent controls or do anything else to incentivise investment property owners to sell up.  

For the five decades following WWII, most adult Australians owned a home. Those that didn’t tended to be people with little political clout (i.e. young voters, poor voters and voters lacking “sanity and sobriety”).      

But the thing about making housing unaffordable is that increasingly fewer people can afford it. The drop off in home ownership this Millennium doesn’t look especially dramatic on the graph above. But there isn’t much churn when it comes to homeownership. Once someone enters the home-owning class they tend to remain part of it until they die.

Australians over the age of around 50 still enjoy high levels of home ownership, but many Gen Xers and most Gen Yers don’t. There is now a growing cohort of highly educated, politically engaged, middle class and even upper-middle class Australians aged 25-50 who can’t afford to buy a home in an area they would like to live in. (Or have to live in for personal or work reasons.)

This demographic has been getting increasingly pissed off and now appears to be mobilising.

Is a revolution brewing?

The estimable Ed West, recently observed:

In his great history of the Bolshevik revolution, A People’s Tragedy, Orlando Figes observed how one of the key conditions for the collapse of czarist Russia was a sevenfold increase in residential rental values during the years preceding 1917. “Such was the demand for accommodation,” he wrote, “that workers thought nothing of spending half their income on rent.” With cities like Moscow and St. Petersburg prevented from expanding by vested interests, housing costs became intolerably expensive and, with little to gain from the system, many gave up on it…

If you’re under 30 and living in a big city today, you might wonder what all the fuss was about. Only half their income? Those lucky Russian factory workers! Some young Londoners in the 21st century are paying up to 60% of their income for the privilege of tiny rooms that are often indistinguishable from prison cells in Europe’s more liberal countries…

Most high-income countries now have a problem with large numbers of disaffected younger people turning to more extreme politics: in the English-speaking world these tend to be on the left, while in much of continental Europe they are on the right, but the common thread is the unaffordability of housing… The problem might become more dangerous in emerging economies, where less established political systems and younger populations make comparisons with czarist Russia more relevant.” 

As many people, including West and I, have observed, an increasing proportion of Gen Yers and Gen Zers in Western nations have been giving up on a version of capitalism that doesn’t allow them to acquire any capital. I don’t believe a revolution is likely anytime soon, but I think significant reform is looming on the horizon.

While it’s yet to attract much attention in Australia, the YIMBY (Yes In My Back Yard) movement appears to be picking up steam in the US. It’s certainly getting some serious intellectual backing; superstar Substackers such as Matthew Yglesias, Noah Smith and  Freddie de Boer regularly bang the drum for greater housing density, especially in cities.    

There are other developments – the upsurge in remote working and the geoarbitrage it facilitates, the death of neoliberalism, and the demographic winter – that would also appear to be pushing property prices down.

But this musing has already gone on too long, so I’ll have to discuss those some other time.