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Tuesday, September 03, 2024
Housing and perceived market failure
I read and watch international news. In a globalized world, it helps with understanding when you can compare what is going on in different countries. And sometimes, surprisingly, you hear the same story from many places all over the world. One of these stories that seems to be ubiquitous to many first world countries is the housing crisis: Both renting and buying houses has become increasingly unaffordable for people on a median income, whether that is in the USA, Europe, or Australia.
What is strange about the story, is that all these countries have capitalism and free markets. Basic economic theory says that if there is high demand, and thus high prices for any good, the market will react by increasing supply, which ultimately brings prices down again. If houses are "overpriced", new construction companies could spring up, and make good profit by building houses and selling them, or renting them out. So, why isn't that the case?
While in some markets the reason for houses being so expensive are particular to the location, like zoning laws in California or the London green belt, there seem to be more universal forces behind the observation that the housing crisis is pretty much everywhere, even in places where land is still available. And in that context I had an interesting experience when we moved into a new house and sold our old apartment: It turns out that while our apartment was legal to live in for us, the moment we sold it the new owner couldn't use it as it was. Building regulations are constantly changing, and the new owner was obliged to spend additional money to bring up the apartment to the building code. Reports about the housing crisis often cite that it was easier for earlier generations to afford a house; but that doesn't take into account the fact that the house your parents built would today be considered illegal and sub-standard.
And at least in Europe, this is going to get a lot worse. The large majority of existing housing stock is considered to be not energy efficient enough to meet European climate targets. Other countries have the same basic problem, but not every government is as willing to wield a heavy regulatory club as the European Union is. It is not as if they were fundamentally wrong here: Making houses more energy efficient through insulation is not only necessary for climate targets, but also a good investment in the long run, especially when energy prices are rising. But regulations explain the perceived market failure of the housing market: If you build a house today following all of today's regulations from safety to energy efficiency, the result is a house that isn't affordable. It's a great house, especially if you compare it to the houses previous generations built, but you need way more than a median income in order to pay the mortgage, or the rent. Building an affordable house is basically illegal in many places. And regulations will catch up to the people who still live in houses that are affordable because they don't comply with modern building codes. The housing crisis will remain with us for decades to come.
- posted by Tobold @ 9:38 PM Permanent Link
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I recommend passing legislation to make it illegal to purchase property in a residential neighborhood for the sole purpose of turning it into a B&B.
Investment companies with deep pockets have the ability to buy up entire neighborhoods if they wish and just use them as a revenue stream, while the public are now unable to afford property in the area due to the manipulation in value this creates.
Investment companies with deep pockets have the ability to buy up entire neighborhoods if they wish and just use them as a revenue stream, while the public are now unable to afford property in the area due to the manipulation in value this creates.
# posted by 
: 3/9/24 22:53
: 3/9/24 22:53
There are actually quite a lot of cities in Europe that passed legislation in that direction. Usually something like making it illegal to sublet your appartment as a B&B for more than X days per year, making a full commercial use unprofitable.
(edit: typos)
I'm seeing this trend in countries that don't care for energy efficiency at all, so it might be not the only factor. Correct me if I'm wrong, but I suspect the reason for the crisis is that buyers who need the houses for housing are in direct competition for the same commodity with investors who want to invest.
As humans need a place to live, they will likely agree to any selling prices, no matter how high they hike, while investors are probably quite happy with rising prices. This creates something of a positive feedback loop where prices can only go up. Also, not dissimilar to OPEC countries, it makes sense for construction companies to construct less housing, not more, to keep prices high, and keep earning more while spending less.
If that's the case, I don't really see any long-term solution, except for making any basic need, be it food, water, air, or housing, impossible to invest in. It would be much safer if investment is only possible in something that has zero practical value as a commodity, such as gold, art, crypto, NFTs, and CS GO skins.
I'm seeing this trend in countries that don't care for energy efficiency at all, so it might be not the only factor. Correct me if I'm wrong, but I suspect the reason for the crisis is that buyers who need the houses for housing are in direct competition for the same commodity with investors who want to invest.
As humans need a place to live, they will likely agree to any selling prices, no matter how high they hike, while investors are probably quite happy with rising prices. This creates something of a positive feedback loop where prices can only go up. Also, not dissimilar to OPEC countries, it makes sense for construction companies to construct less housing, not more, to keep prices high, and keep earning more while spending less.
If that's the case, I don't really see any long-term solution, except for making any basic need, be it food, water, air, or housing, impossible to invest in. It would be much safer if investment is only possible in something that has zero practical value as a commodity, such as gold, art, crypto, NFTs, and CS GO skins.
It's not just energy efficiency, it's fire and earthquake protection etc. This is an example from nz The protective door you can buy is >$1000 a cheap door is $200 or so. On a short passage with 3 feet between doors they are forced to put multiple $1000 doors because the building inspector said it was not safe to only have a single $1000 door.
btw the construction companies here in Australia are frequently failing so the current situation Is not actually helping them.
btw the construction companies here in Australia are frequently failing so the current situation Is not actually helping them.
# posted by : 4/9/24 02:35
: 4/9/24 02:35
Although (the lack of) energy efficiency in older houses is undoubtedly a factor, it is not nearly the main reason why supply cannot keep up with demand. I would like to see examples of your claim that prices increase even when there is plenty land available, because I think you're wrong there. The areas you name where land is scarse are WAY too constricted - there are many many more areas where this is the case. In the Netherlands, which is after city states like Monaco, Gibraltar, San Marino and Malta the densest populated country in Europe, there are plenty of opportunities for affordable houses, but they are in rural areas where people don't want to live. So the amout of room available definitely is a factor.
But mostly: in the places where people DO want to live, the risk vs reward for developing housing projects is too high for developers precisely due to interference by the government in the free market. Developers that want to jump in have to deal with unrealistic timelines around licening, permits, environmental rules (for building the project, not only for the building itself), rules around social housing, rent control, tax regulations etc. Due to the length of these procedures, the outcome is unrealiable. You can invest millions into a project only to find out years later that government changes the rules uinderneath you, making your project impossible or not profitable.
But mostly: in the places where people DO want to live, the risk vs reward for developing housing projects is too high for developers precisely due to interference by the government in the free market. Developers that want to jump in have to deal with unrealistic timelines around licening, permits, environmental rules (for building the project, not only for the building itself), rules around social housing, rent control, tax regulations etc. Due to the length of these procedures, the outcome is unrealiable. You can invest millions into a project only to find out years later that government changes the rules uinderneath you, making your project impossible or not profitable.
# posted by : 4/9/24 12:16
: 4/9/24 12:16
This same thing has happened with automobiles. Increasing regulation requirements hit people with less money the hardest and just generally increase the cost of living. Some of it is necessary, but some isn't (like back up cameras being required).
The interesting thing is who really bears the cost. It's not people like me who own their home since my value has increased so even if I sell and buy something more expensive whatever increase is offset by the increase profit that I receive from my sale. This hurts new home owners the most or people that want (or "need") a bigger and therefore most likely more expensive home.
My thoughts on this is that governments should try and reach targets through incentives rather than regulations. It would also give people a much better view of governments. If there was an incentive such as $1000 off yearly taxes for certain home energy efficiency targets then consumers would want that, builders would want that, and people wouldn't say that the government is forcing them to do something. I'm sure it wouldn't be that simple, but it seems better than what we have.
The interesting thing is who really bears the cost. It's not people like me who own their home since my value has increased so even if I sell and buy something more expensive whatever increase is offset by the increase profit that I receive from my sale. This hurts new home owners the most or people that want (or "need") a bigger and therefore most likely more expensive home.
My thoughts on this is that governments should try and reach targets through incentives rather than regulations. It would also give people a much better view of governments. If there was an incentive such as $1000 off yearly taxes for certain home energy efficiency targets then consumers would want that, builders would want that, and people wouldn't say that the government is forcing them to do something. I'm sure it wouldn't be that simple, but it seems better than what we have.
I'm in New Mexico where there is plenty of land and the housing market (and rental market) is out of control.
I think that higher cost due to higher building standards is part of the problem but there are definitely other factors at work. The rise of private equity firms targeting residential property investment is a huge factor on the demand side as is the rise of short term letting via air bnb.
At least the costs of higher building standards are likely to fall due to the experience curve. Every time we try to make something new it costs a lot at first but the cost falls as more of the new thing is made.
At least the costs of higher building standards are likely to fall due to the experience curve. Every time we try to make something new it costs a lot at first but the cost falls as more of the new thing is made.
# posted by : 5/9/24 07:28
: 5/9/24 07:28
The problem existed well before environment legislation and airBnB occurred in anyone's mind.... Free market doesn't really work when the prices are not limited by how much you can spend, but the limit is how much a bank is willing to lend you. And banks always have interest to lend you as much money as possible. Put into law that a house mortgage is limited to 50% (or less) of the market price and you'll see prices go down, as expected in a free market.
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# posted by : 5/9/24 07:52
: 5/9/24 07:52<< Home
