An argument for moderating housing price inflation

Posted to the CNU Next Gen list:

Housing is a social right, and it (along with health care) is recognized as such in much of the industrial world. Even otherwise laissez-faire Hong Kong (where even central banking has been privatized) has truly vast social housing projects — a recently attempted spinoff of just their retail shops would have created Asia’s largest REIT–and they seems to work just fine. Sure, that sounds socialist (and much of what follows will undoubtedly get blasted as “meddling social engineering” by others here), but hopefully most of us can agree that adequate, affordable housing helps people access economic opportunities.

For instance, shelter is one of Maslow’s physiological human needs and is widely defined as a basic social right by many countries (and indeed, by some US cities). Substandard housing remains a public health hazard; asthma (one root cause of which is vermin) and lead poisoning are still epidemic in inner cities; overcrowding, still common in many urban immigrant neighborhoods, aids the spread of communicable disease. Employees and children in stable housing situations do remarkably better in school and at work. Well-located affordable housing helps workers and children access economic opportunity in the form of jobs or good schools, and, by keeping housing costs from swallowing half of a family’s income, allows families to keep more of their income. (Such “extreme rent burden” is much more common than one might think.) Socioeconomic diversity and low rates of transience within neighborhoods help maintain social cohesion and a sense of place, which are particularly important in a democracy.

However, the domination of American politics by homeowners, and the corresponding domination of American wealth by housing, creates a structural bias in favor of endlessly rising housing prices. Since most voters are homeowners, most voters will do anything in their power to increase their houses’ property values, and with it, their personal wealth. And they’ve succeeded: although incomes in the US have increased substantially in recent decades, much of that increase has been eaten up as costs for housing and transportation rise faster than incomes. (That is, house prices as either a multiple or percentage of income have increased.) To a certain extent, we now receive much more (and higher quality) housing and transportation than our forebears, but the real costs of basic services (i.e., one commute or one adequate apartment) have increased substantially.

Tony Downs explains this structural bias in favor of housing prices like so:

[E]normous economic and political forces are arrayed against increasing the supply of new units enough to reduce housing prices generally. These include all the financial institutions that have lent trillions of dollars in mortgages… the homebuilding industry, and the 67 percent of all U.S. households who are homeowners. These powers all have vested interests in keeping home prices rising � which means making them less affordable to potential buyers and existing renters, especially the poor. In fact, almost all local suburban governments… are politically dominated by homeowning voters whose biggest investments are in their homes. They want housing prices to rise, or at least to remain stable � certainly not to fall… Thus, the probability that any growing region can build enough new housing to meet all its shelter needs… is close to zero because the vast majority of citizens and governments do not want housing in general more affordable.

One result is that, from an econometric standpoint, Americans in high-cost
metros are spending more than the optimal share of income on housing. That
is to say, if all Washingtonians got together and decided to cut the cost of
housing by 40%–so that 15% rather than 25% of Washingtonians’ incomes went towards housing — the 10% increment of income freed up could be put into
other, more economically productive forms of investment or consumption, as money spent on goods such as food produce a higher multiplier effect than money spent on housing.

Price speculation in housing also has significantly higher social impacts than speculation in Internet stocks, coffee futures, or tulip bulbs, because shelter is a fundamental need for all humans (and, I believe, a right). Speculation (ostensibly a private activity) often has broad external (social) costs. A glut in coffee, as is happening now, depresses wages throughout the already poor developing world. Land speculation at the edges of downtowns nationwide is largely responsible for those dead zones of parking, which ultimately hurt downtown’s economic viability and desirability.

There’s also Henry George‘s argument against land speculation; essentially, that land price speculation is a unique threat to economic growth since land is necessary for all economic activity. (Marx called it “a condition of production.”)

Jon Barsanti wrote:
I am interpreting what you are saying is that as a buyer that housing should not be viewed upon as a high return investment opportunity.

Correct. People who buy houses should think of it more as “I’m purchasing shelter,” not as “I’m making a big, speculative investment and, oh, by the way, getting shelter, too.” Expecting consistently high annual price appreciation in _anything_ is problematic, and expecting so of housing is especially problematic.

First off, such an expectation is, in many cases, liable to result in personal disappointment; any investment bought with the expectation of high, sustained returns — returns outperforming market fundamentals, like income growth — is, by definition, subject to a speculative asset price bubble. Bubble collapses often overcorrect, depressing prices below their fair value, and so are especially harmful to social stability. Government should not encourage the growth of price bubbles.

Second, consistently escalating housing prices result in a host of social costs, as outlined above.

Along more pragmatic lines, all this talk about ever-rising property values
misses out on the stagnating metropolitan regions and even disfavored
sectors of growing metros that have missed out on the steady upward march of
housing prices — in many cases solely because of the neighborhood’s race. Public policies should not promise ever-higher housing prices, since we simply can’t deliver on such promises.

For instance, three almost physically identical, well-tended neighborhoods in Chicago’s bungalow belt (say, Auburn-Gresham, Brighton Park, and Mayfair) all began with substantially similar house prices in the 1920s, but today the only one to maintain a White majority has prices twice as high as the other two. My own apartment (in a gentrifying core neighborhood) has appreciated more in a year than my parents’ house (in an inner suburb of a boomtown) has in a decade.

In sum: safe, decent, affordable housing is a social right, which society should be obligated to make possible to all its members. People who have affordable housing are more able to participate fully in both society and economy. However, the current US housing regime encourages unsustainable price increases for housing (through market speculation, which imposes additional social costs), which makes providing affordable housing ever more difficult. Further, we cannot guarantee such unsustainable price increases without further distending the market, so we should stop promising them.

and a follow-up with a libertarian, after the jump

On 5 Jan 2005, at 20:14, Chris Fiscelli wrote:
rising house prices are essentially part of a conspiracy among homeowners, financial institutions, homebuilders, and politicians.

Not a conspiracy, any more so than patriarchy or sprawl or “the invisible hand” is a conspiracy; just that the emergent structures in place would tend, over time and over millions of individual choices, to promote ever-rising house prices.

Why is that conspiracy effort failing in South Dakota, Kansas, and Kokomo, IN and succeeding in California and much of the northeast?… In fact, the places where prices are rising so rapidly are precisely where homeownership rates are lowest.

The aforementioned structural forces merely exacerbate the supply and demand phenomena you identify in favor of higher prices. Supply is artificially constrained in some locations through mechanisms you describe, like growth moratoriums or snob zoning; demand is artificially inflated through tax policies that make owning cheaper than renting. In other areas, either demand or supply are relatively unconstrained (either by law, as is often the case in areas with “growth machine” politics, or by, say, a lack of traffic jams), and those market forces result in, say, fast growth and no increase in housing prices or slow growth and flat or decreasing prices. In still other areas, like in California, I would argue that a speculative bubble is another large distortion on prices.

Even in areas that would seem to be politically dominated by renters (e.g., my neighborhood is 64% rental), the policies still tilt in favor of homeowners, who for reasons beyond my explanation have an outsized say in local government. Just this past year, yet another property tax bill lowering taxes for homeowners and raising them for renters sailed through the legislature — with the strongest support coming from legislators representing gentrifying, majority-renter areas. By further reducing one cost constraint on homeowners’ budgets (and by preventing a wave of panic sales), the bill had the effect of further propping up inflated home values — and, by further raising the price of renting, created another economic incentive to buy.

You completely ignored the effects of supply and demand (I know most of you really hate when I bring up economics).

Woah, wait a second. I wrote: “Expecting consistently high annual price appreciation in _anything_ is problematic, and expecting so of housing is especially problematic… any investment bought with the expectation of high, sustained returns — returns outpacing market fundamentals, like income growth — is, by definition, subject to a speculative asset price bubble.” “Market fundamentals” implied supply and demand. My original comment in August was “We can not, and indeed should not, expect housing to be a high-yield investment.”

If you are speculating on housing with something other than your bread money (as Bill Bennett says), more power to you — you will, like all investors, win some and lose some. However, I don’t believe that government policy should favor one speculative investment vehicle over another, and in the case of housing people have come to expect high yields without high risk — and, as a result, have hedged their bread money on it. When those downside risks (like higher property taxes) come to bear, homeowners demand and win bailouts (like extending the
“homestead” capital gains tax exemption to second home sales.) That’s not fair,
and I hope you’d agree that’s not good economics.

You also point out, rightfully, that housing payments are accounting for more of some households’ income, but that is a private choice… And it is a choice.� Housing affordability is really only an issue in some markets.� It is not a national situation.

Sure, I suppose that it is on some level a choice, that poor families sleeping in unheated hovels in the Bronx could just move to Nebraska. However, I hope you understand some reasons why it’s not quite that easy. If you don’t, I suggest you go and talk to such a family.

What exactly are you suggesting “we” do about this?� I don’t see this as a speculaton issue, but rather one of building deterioration, personal cleaniness,�or possibly construction standards.

It is partially a speculation issue: buildings in many urbanneighborhoods are allowed to deteriorate precisely because they’re held solely on speculation by absentee owners. There are lots of small solutions for substandard housing, like changes in building codes, microcredit facilities, better code enforcement, and tax credits for rehab; a lot of these exist and work well.

In fact, I don’t know how one could argue that the US population, on balance, is maybe the best or one of the best housed nations in the world.�

I’m not arguing against that notion, but it does tend to gloss over the fact that substandard housing does indeed exist.

with the large public housing projects built post WWII in inner cities like Cabrini Greens

Actually, the worst extant housing conditions in this city are inside and outside public housing projects, in desperately poor neighborhoods which have suffered from sustained capital flight on behalf of landlords both private and public. (Also, for out-of-towners, Cabrini-Green is two adjacent housing projects: one named after St. Frances Cabrini and the other after William Green.)

Homelessness and poverty relative to housing, is a human capital problem, not a physical capital one.

To a certain extent, I’d agree that it’s a human capital problem. People need better jobs. But… when people have “good jobs” and still can’t afford decent housing for their families, I believe (and, if surveys are to be trusted, much of the public also believes) that government can play a role in helping them afford better housing.

speculation will be part of that unless you would like to impose a national CC&R that limits appreciation to 4% annually- good luck.

I never said that was a policy option. As above, if people want to speculate with their extra cash, that’s fine — as long as government doesn’t encourage bubbles, and as long as social costs are contained. There are good incentives out there to reduce its negative social effects: for instance, the Henry George solution is the land value tax (e.g., a property tax paid only on land, not buildings). Already, high property taxes do a pretty good job in many places of preventing truly egregious land speculation.

By the way, I really don’t think this is a conscious policy decision as you do.� I think it is more of a consequence of other actions.�

I also don’t think it’s usually a conscious policy decision; see discussion of “conspiracy” above. In some cases, though, as with NIMBY opposition to affordable or even multiunit housing, the “protecting property values” argument is very much front and center.


One thought on “An argument for moderating housing price inflation

  1. “After several years of reporting on the housing market, I’m convinced that the most common real estate mistake is viewing a house first as a financial investment and only second as a home. That’s one big reason we ended up in this bubble-induced mess.” – David Leonhardt, “Time to Buy?” in NYT

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