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Thursday, 16 January 2025
Monday, 22 April 2024
How's this for an idiot economists view of the housing market?
Dean Baker tells us that paying out 34% of your income on housing in 2024 is OK because
--today's house are bigger than before (not in UK), and
--they boast lots of extra goodies like double glazing and central heating (true, but that only accounts for a tiny amount of the huge price rises. I know, I've done the research 1984 J Valuation)
--Most ridiculous argument of all. Food used to be 24% of household spending, now less than 10%. So you've got all this spare cash, which can be diverted into buying your accommodation. Is Baker mad? Why isn't housing going down in cost like everything else? If it was then we could earn as much as we do today and splurge out on luxuries, or BETTER STILL, keep our current lifestyles and get by on lower incomes.
BY DEAN BAKER
I am not ordinarily a celebrant for the state of the economy, but the
media have been so over the top in pushing the economic doom story during the
Biden presidency, that I feel the need to put some reality into the picture.
One of the central lines among the doomsayers is that we are spending a
larger share of income on housing and that for many it has become altogether
unaffordable. I will agree that housing is a serious problem. In fact, I
recently authored a piece in a new collection on the issue, which I would encourage everyone to read. We need to
build more housing and especially more affordable housing.
But acknowledging that housing is a serious problem is not the same as
saying it is an unprecedented crisis, and many of the things that have been
asserted in the media are simply not true. For example, it is not true that
homeownership is no longer part of the American dream for young people. In
fact, homeownership rates for young people are above their pre-pandemic level.
It’s true that the run-up in mortgage interest rates since the Fed began
hiking in March 2022, coupled with rising house prices, has made the cost of
buying a home prohibitive for many new buyers, but few expect rates to stay
this high for long.
Mortgage rates are highly cyclical, they go up when the Fed raises rates
in an effort to slow the economy. The current rates of near 7.0 percent are
high compared to the 3.0 percent rates we saw during the pandemic, but they are
not high by historic standards. In 1981, they peaked at over 18.0 percent.
I don’t recall reporters at the time writing pieces as though 18.0
percent mortgage rates would persist for the indefinite future. I am not sure
why they feel the need to write that way about the current 7.0 percent rates.
Another aspect of the manufactured housing crisis story is that we are
spending higher shares of our income on housing, with a record number of people spending more
than one-third of their income on housing. This share has been dubbed as a
crisis point by some.
It is certainly true that we are spending a much larger share of our
income on housing than in prior decades, but a big part of that story is that
we are spending a much smaller share on other things. The graph below shows the
share of disposable income going to food, clothes, and household furnishings
since the late 1940s.
Source: National Income and Product Accounts, Table 2.3.5 and author’s
calculations.
As can be seen, there has been a sharp reduction in the shares of all
three. This is especially striking with food. In 1947 we spent 23.0 percent of
our income on store-bought food. This had fallen to just 7.1 percent last year.
The share of income going to buy clothes fell from 10.3 percent to 2.6 percent.
The share for buying household furnishings dropped from 5.5 percent to 2.5
percent.
These declines freed up income to go to other areas, and one area that
extra income went to was housing. The houses we live in today are on average
much larger than the ones we lived in 75 years ago. They are also far more
likely to have air conditioning and relatively clean sources of heat. (Coal
furnaces were still common in the late 1940s.) They are much better protected
against fires and less likely to have harmful chemicals like asbestos and lead.
As a result of reduced spending in other areas, and the higher quality
of the housing we live in today, the share of our income going to housing now
exceeds 34.0 percent, on average. (This figure includes “owner equivalent rent,” the money
that a homeowner would be paying to rent the home they live in.)
Given the 34.0 percent figure is an average, it is hard to see the
one-third level as a crisis. Rather, we probably need to recalculate what share
of income going to housing costs presents an unmanageable burden.
None of this should be taken to mean that we don’t have to do things to
make housing more affordable. We need to ease up restrictions that block both
new construction and the conversion of empty office space to residential. And
we should ensure that a substantial share of these new units are affordable.
We can also take short-term steps to improve affordability, like limiting vacation rentals and
having moderate rent control. A vacant property tax is also a good way to get
more units on the market. It will also be good when Jerome Powell and the Fed
get over their inflation fears and start to ease up on interest rates.
We have a serious shortage of housing in the country due to a sharp
plunge in construction in the decade following the collapse of the housing
bubble. We were gradually getting back to more normal levels of construction
when the pandemic broke out. If we can sustain higher levels of construction
for several years and convert many of the offices that are currently vacant,
due to the explosion in people working from home, we can lower housing costs.
But it is helpful to look at the issue with clear eyes. The biggest
reason housing has grown as a share of our income is that we are spending so
much less on other necessities. That is a good thing.
This first appeared on Dean Baker’s Beat the Press blog.
Dean Baker is the senior economist at
the Center for Economic and Policy Research in Washington, DC.
Friday, 1 March 2024
Halligan's Iron Triangle of Influence
Dealing with the opposition:
Who are the forces driving the failure of the Housing Market?
They are the ones who promote the mistaken belief that
"It's just a question of Supply and Demand. Economics 101. Build more and prices will come down!"
This is just what the folks who like things as they are like to hear.
They are the ones who are happy when journalists and commentators spout this nonsense.
They the people who are very happy when politicians echo this back, and produce damaging Help-to-Buy schemes.
These are the people whose self-serving
opposition has to be countered.
Who are they? Liam Halligan in his book Home Truths produces this brilliant image to explain the forces driving the failure of the Housing Market.
THE IRON TRIANGLE of vested interests which have the Housing Market clamped into failure mode
Banks who lend recklessly, trusting that
house-prices never go down. Any crazy lending to NINJAs will soon be fixed
by rising prices,
Housebuilders locked into this dysfunctional
market, but by acting rationally make good profits out of land-banking and land
speculation.
These are the three most formidable interest groups who must be won over, by persuasion, by bribery, or by sheer brute force if necessary!
So you think the Housing Crisis can be fix by BUILDING MORE?
This is a paper by Ian Mulheirn from 2019 called Tackling the UK housing
crisis: is supply the answer?
So all of the dimwits who prattle on about
"Oh it's just a simple matter of Supply and Demand, Economics101.
Build more--increase supply--and prices are bound to come down.!
Don't they realise that the Housing market is anything but normal?
Just the fact that most buyers, especially FTBs need a mortgage shows that the housing market is not 'normal'.
Not normal, in the way that markets for baked beans, laptops, cars or any other commodity operates.
Could this be a false Narrative put out by influential housing stakeholders in order to protect their unearned and undeserved Wealth?
Well, maybe.... See what Liam Halligan said about the IRON Triangle
Wednesday, 4 October 2023
Will ‘Upward Intensification’ stop house prices rising?
<- Shanghai suburb Or leafy Dublin suburb? ->
Here’s an FT writer using click-bait in an
attempt to ‘prove’ building more stops house prices rising.
John Burn-Murdoch writes
for the Financial Times, a highly respected newspaper. Read widely in the
commercial world, it (the FT) cannot peddle the usual narrative propaganda to its
well-informed readership.
John B-M writes some very
good stuff, but this article which claims to overthrow the mantra of “building
more houses won’t stop house-prices rising” is nothing of the sort. Let’s look
a bit closer.
(Normally FT articles are
behind a strict paywall. However, so pleased was J B-M with this piece that he
open-sourced it on his TwitterX account. So I think it’s OK for me to reproduce
it in full here. My comments are [added in italic,thus]
So here’s John
Burn-Murdoch’s piece
= = = = = = =
Repeat after me: building any new
homes reduces housing costs for all [note
the childish tone!]
Building
unsubsidised housing pushes down rents and prices while freeing up cheaper
properties [always?
As we’ll see only in very specific circumstances]
15 Sept 2023
https://twitter.com/jburnmurdoch/status/1703752585386094633
Nimbys have long opposed
housebuilding on the grounds that it lowers the value of their own properties. [
No they don’t! It’s loss of amenities, views etc, and the disruption caused by
building that mostly bugs them.]
But lately they have found unexpected allies
in the leftwing “supply scepticism” movement, whose advocates argue against new
market-rate housing developments on the basis that they may increase rents and
prices locally — hindering their aim of making housing more affordable for
people on low incomes. [Phew! ‘supply scepticism’! Lefties! This long
sentence is loaded with straw-men.]
This position rests on a
rewriting of one of the fundamental principles of economics. All other things
being equal, if the supply of a good or service increases, its price will
decrease. Unless that thing is housing. [What a clown! Housing is most emphatically not
just a normal good, it is also primarily an investment vehicle. Of course the
laws of supply and demand cannot work here.]
It would be exasperating [!]
enough if that way of thinking were confined to the supply scepticism group
— which has already contributed to delays and outright blocking of proposed
developments around the US. But the affliction appears to be much more
widespread, according to a recent paper by three social scientists in
California. The study found that when Americans were asked [!] to
predict the impact of a supply shock on prices for labour, commodities or
consumer goods, the correct answers outnumbered the wrong ones by at least two
to one.
[What next? Public surveys
conducted to test the validity of Copenhagenist versus frequentist theories of
Quantum Physics?]
When asked about the impact
of a 10 per cent increase in regional housing supply, however, 40 per cent say
prices and rents would rise, while only a third say they would fall. [Do
obscure, baffling references to ill-informed opinions the US add much to his
case? I think not!]
The supply sceptics have
theories [not just theories, there’s plenty of evidence too, from Ireland
especially, and here on this blog, in my very first posting back in 2017] for
why housing could be different,
but they fall apart when
confronted with the evidence, as set out in a comprehensive review of the
latest research by James Gleeson,[more on what Gleeson actually said later]
a housing analyst at the Greater London Authority.
One argument is
that only by building affordable housing can you increase affordability.
Market-rate dwellings will simply go to people on higher incomes, leaving lower
earners high and dry. But recent studies from the US, Sweden and Finland all
demonstrate that although most people who move directly into new unsubsidised
housing may come from the top half of earners, the chain of moves triggered
by their purchase frees up housing in the same cities for people on lower
incomes. The US study found that building 100 new market-rate dwellings
ultimately leads to up to 70 people moving out of below-median income
neighbourhoods, and up to 40 moving out of the poorest fifth. Those numbers
don’t budge even if the new housing is priced towards the top end of the
market. [straw man, no ref, but I’ve done the homework and found out who
James Gleeson is, and what he says. More later.]
Another argument is
that building market-rate housing in a lower-income area leads to gentrification,
with higher earners moving into a lower-income area and displacing the
incumbents. But the latest research from Britain and the US shows that there is
typically little, if any, outward displacement of incumbents. It is the
incomers who have been displaced, priced out of wealthier areas by supply
constraints. In other words, even if you think it’s inherently bad if high earners
move into poorer neighbourhoods, the answer is to build more market-rate
housing for those higher earners.
[Both of these cases are
very specific to particular local conditions. The Housing Market Big Problem is
that the whole level of prices is far too high, has galloped up far faster than
inflation, and requires huge amounts of subsidy just to ensure sub-average
income families get housed. Fix the impossibly high house prices first (as they
did in the 1930s and to some extent in the 1950s/60s) and THEN you can talk
about balancing supply and demand.]
Recent policies to increase
housing supply in major western cities are compelling — as documented in recent
analyses by Australian economist Matthew Maltman. In November 2016, large areas
of New Zealand’s largest city, Auckland, were rezoned to allow for higher-density
building. The results were twofold: a boom in construction of multi-unit
housing — predominantly at market rates — and the flattening off of rents in
the city in real terms. On the eve of upzoning, median rents were 25 per cent
higher in Auckland than the capital Wellington. Six years later, nominal rents
had grown by an average of 3 per cent a year in the former and 7 in the latter,
putting the two neck and neck. Adjusted for inflation, renting in Auckland is
now no more expensive than it was in 2016, compared with a 25 per cent rise in
Wellington.
[I can’t be bothered to
follow up this obscure, far-away, and quite probably irrelevant case study! Try
thinking how this would work in London? Manchester? Cardiff? Tower blocks
everywhere? ]
It’s a similar story in the
American Midwest, where Minneapolis has been building more housing than any
other large city in the region for years, and has abolished zones that limited
construction to single-family housing. Adjusted for local earnings, average rents
in the city are down more than 20 per cent since 2017, while rising in the five
other similarly large and growing cities. If you want to improve housing
availability and affordability for all, the good news is that any new housing
will help.
[and here the article ends.
Not a glimmer of insight into the politics of planning, the actual economics of
the housing markets, the steps that could be taken to fix the whole thing, not
little bits of tinkering here and there]
john.burn-murdoch@ft.com,
@jburnmurdoch Copyright The Financial Times Limited 2023.
But what did James Gleeson,
who works for the Greater London Authority really say:
- financialisation
does increase demand to own housing [yes banks are
the proximate cause of pumping up house prices]
- but if
housing supply is elastic then house prices don’t
have to rise much and rents can even fall [words fail me! Of course
(new) housing supply is very inelastic, do the maths.]
- when
land supply is relatively fixed, the key to elastic housing supply is
allowing land to be used more productively through denser construction. [Land
is always in fixed supply, and it is good to see at least a mention
of the most important factor determining the market price of houses! But
will intensification will save us all? Probably, but not until the market
is fixed.]
So ONE correct and obvious conclusion, two abstruse and unattainable
conclusions
****HERE’S MY DEBUNKS
1.Apr21
http://housescheaperbettermore.blogspot.com/2021/04/cps-tory-thinktank-still-flogging-dead.ht
No More PPs won’t and
didn’t fix it, on either supply or price
2. http://housescheaperbettermore.blogspot.com/2017/11/its-true.html#more
Nov2017
Oxford boffins say building
more hasn’t slowed HP rises, nor will it.
3. http://housescheaperbettermore.blogspot.com/2017/07/
july2017
Ireland shows why even
massive build-more didn’t SHoPRi
4. http://housescheaperbettermore.blogspot.com/2017/04/building-more-houses-wont-bring-down.html#more
apr2017
My first blogpost in response to Govt’s Fixing Our Broken Housing Market inanity
Tuesday, 29 August 2023
Sunday, 3 July 2022
The Spectator gets it half-right on fixing the broken housing market.
“50-year mortgages won’t fix Britain’s broken housing market” is the headline. This is in response to the Government’s latest wheeze to pretend they are doing something about the Housing Market.
The author of the article rightly pours scorn on
this idea. It is one of a series of gimmicks from this and previous
governments, all of which just push prices up higher.
So far so good, but then comes the utterly conventional,
but wildly wrong explanation:
“The problem
with the British housing market is that there isn’t enough stock relative to
the population, and where there is stock available, it’s in the wrong place.”
It’s all down to supply of new housing being deliberately limited says
the author Sam Ashworth-Hayes (former director of studies at the Henry Jackson
Society):
“British
politicians have created an almighty mess. Restricting housing supply caused
prices to rise, and meant people borrowed increasingly large sums of money to
buy homes.”
(The author seems deeply incurious as to where the ‘increasingly
large sums of money to buy homes’ comes from!)
Governments
are deliberately restricting supply of new builds? That’s nonsense!
If the rate
of housebuilding was in some fairly-tale land doubled, tripled or quadrupled
would that bring down prices? No, because the 80-90% of the houses for sale are
already there!
And the
conclusion:
“And until a
politician is brave enough to grab the nettle and risk a drop in property
prices, we will be stuck with a housing market that ruins the lives of young
people before – eventually – turning them into lobbyists for its maintenance.”
The author
thinks that the ‘nettle’ it is the power of the Nimbys that must be ‘grabbed’,
but the real force that is pushing up house prices is the ability of the
financial system to create unlimited amounts of mortgage funds.
‘Rein in the
power of the banks!’ Now that would be a brave new slogan for the
freedom-loving Henry Jackson Society!
- - - - - - -
50-year
mortgages won’t fix Britain’s broken housing market
2 July 2022, 8:30am
2
July 2022, 8:30am
Downing Street has come up with another cunning plan to fix the housing
crisis: 50-year mortgages, passed from parent to child. No longer will your
ability to afford a home be dependent on your earnings. Once the scheme is in
place, you will be able to borrow against the incomes of your future children,
in a heart-warming recreation of the age-old tradition of indentured labour.
The reasoning goes something like this: young people can’t afford to buy
homes. Not only can they not afford to buy homes, they can’t afford to save for
deposits. While accommodation has grown ever more cramped – with space per
person dropping a quarter between
1996 and 2012 – rents have continued to
eat into incomes. Record numbers have are stuck living
with their parents, unable to start their lives as adults, let alone start
families.
In order to help them, the government is going to make it easier to borrow money. This could mean
smaller deposit requirements, or it could mean very long repayment periods. The
latter would be enabled through mortgages that parents could pass onto their
children, replicating policies introduced in Japan in the 1980s. It’s a simple
idea, and one with no chance of working.
Mortgages let you borrow against your future earnings. The longer the
period of earnings, the more you can borrow. At some point, it is somewhat
optimistically assumed that you will retire, stop working, and stop earning.
This caps the amount a lender will offer you. Making mortgages transferable
allows you to borrow against the earnings of your children: you make payments
until you die, and they inherit both the house and the remaining debt.
The
main effect of 50-year mortgages will be to drive prices higher
Longer mortgages won’t do a thing to help young people onto the housing
ladder. As with Help to Buy, Lifetime ISAs, and every other policy the
government has trotted out over the past decade, No. 10 seems to think the
fundamental problem with the British housing market is one of demand: people
just aren’t spending enough.
This is wrong. The problem with the British housing market is that there
isn’t enough stock relative to the population, and where there is stock
available, it’s in the wrong place. It’s like a game of musical chairs. You
aren’t going to get five people onto three seats, no matter how much financial
engineering you engage in.
This lack of supply in the places people actually want to live is why
buildings which used to be family homes have been turned into unsatisfactory
house shares. It’s also why prices will continue to rise until people are
actually permitted to build homes.
From this perspective, the main effect of 50-year mortgages will be to
drive prices higher. Red tape in the planning system stops supply responding to
demand. Increasing people’s ability to spend money just results in bidding wars
over the properties already available.
It’s not even particularly true that longer mortgages are more
affordable. Monthly repayments for a given sum work out as practically
identical whether you stretch them over 29 years – the current average duration
– or 50. Borrowing a larger amount would actually drive them higher. If 50-year
mortgages become the standard, people will end up with more debt, the headache
of making mortgage repayments in retirement, and they’ll end up in the house
they would have bought anyway.
What’s deeply frustrating is that the government almost certainly knows
it won’t work. The reason Downing Street keeps tinkering with demand is very
simple: it thinks doing anything to fix supply will lose it the next election.
British politicians have created an almighty mess. Restricting housing
supply caused prices to rise, and meant people borrowed increasingly large sums
of money to buy homes. As prices continued to rise, each new group of
homeowners was increasingly locked into the system: with their net worth tied
up in a single asset. A market correction would see their savings wiped out and
trap them in the misery of negative equity.
Combine this
with Britain’s ageing population, and you have a perfectly self-perpetuating
form of political dysfunction. Any attempt to liberalise planning mobilises masses of Nimby voters
concerned about falling property values. And until a politician is brave enough
to grab the nettle and risk a drop in property prices, we will be stuck with a
housing market that ruins the lives of young people before – eventually –
turning them into lobbyists for its maintenance.
WRITTEN BYSam Ashworth-Hayes
Sam Ashworth-Hayes is a former director of studies at the Henry Jackson
Society.
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