Next to inflation, housing is the top financial worry for people across the globe.
The housing crisis is a global phenomenon that hits the middle and working classes the hardest. Studies of the Canadian, British, European, and East Asian markets have also found that housing prices have risen far faster than household incomes and inflation.
A report from the Organisation for Economic Co-operation and Development concluded that “housing has been the main driver of rising middle-class expenditure.” In prosperous and communitarian Switzerland, Zurich studios sell for well over $1 million, and small houses even more, making downpayments unaffordable to affluent people despite the overwhelming financial advantages to homeowners.
Underlying the plight of home buyers worldwide is a sometimes overlooked but profound influence – the spread of restrictive land-use regulations. It’s reshaping political and economic alignments in ways that may further destabilize the social order.
The rapid inflation of housing costs stems primarily from ever more constricting land-use regulations. Inflated prices are particularly rife in countries and states with strict regulations like California, where high-income households now utterly dominate the housing market, and more than a third of all real estate transactions in recent years topped $1 million.
At the crux of the problem is a series of housing policies referred to as “urban containment.” Decades ago, there was ample land within these boundaries, but this has changed as population growth has stimulated more demand. The simple fact is that once the urban limits are reached, land prices along the boundaries – the suburbs and exurbs – and in the areas still open to development inevitably rise. This mimics the effects of the 1970s gasoline embargoes that drove prices through the roof – and is nothing more than basic economics. Rationing tends to increase prices.
To this flawed approach, many jurisdictions have imposed other costs such as high-impact fees, lengthy environmental reviews, minimum parking mandates, and historical preservation designations. But generally, nothing quite compares with urban containment, as it drives up land costs by restricting development on the periphery, where land prices are the lowest.
In almost all cases, the highest housing prices occur in markets that are characterized by this planning strategy. This includes all markets in Australia and New Zealand and many in Canada, the United Kingdom, the U.S., Western Europe, and China.
The connection between policy and prices is clearly evident.. As late as about 1990, national price-to-income ratios were “affordable,” at three or less in Australia, Canada, Ireland, New Zealand, the U.K., and the U.S. Today, the median multiple in these countries tends to be over five. But the worst results, as seen in most recent Demographia International Housing Affordability Study – Hong Kong, Sydney, San Jose, Vancouver, Los Angeles, Adelaide, Honolulu, San Francisco, Melbourne, Brisbane, as well as Greater London, are at a remarkable nine or above.
Highly restrictive planning policies also impact renters. Urban containment and other planning policies have devastated middle-class aspirations in every country or region that adopts them, even in countries like Australia, which enjoy a vast land mass and a smallish population.
Young people are most impacted by this policy regime. In the U.S., homeownership for people under 35 has fallen fairly steadily. Similarly, in Australia, the percentage of households aged 25 to 34 owning homes has dropped from more than 60% in 1981 to only 45% in 2016.
Similar trends are seen in other high-income countries, including Ireland, where only a third of millennials own a home, compared with almost two-thirds of baby boomers when they were the same age. At least one-third of British millennials are likely to remain renters permanently.
A big driver of suburban growth is minorities and immigrants. Today, most high-income countries are primarily suburban. A Statistics Canada analysis of 2021 census results indicates that more than 75% of the population lives in the suburbs, Even in transit-rich and land-short Japan, residents of Tokyo, Osaka, and Nagoya are dispersing away from the urban core to suburban and exurban areas. Much the same can be said of Seoul, South Korea, which is even denser than the Japanese megacities. An analysis of the 53 U.S. major metropolitan areas finds that more than 85% of residents live in suburban or exurban neighborhoods.
Today, the trend towards democratization of landownership is being reversed, with more and more people being pushed into living in rented apartments or houses, with little chance of gaining financial independence.
If unchecked, the pattern of declining ownership and rising prices for housing could shape the politics of the future, particularly among young people. Ultimately, the battle over land and property will define our future. We either accommodate hope among those in the next generation or force them to accept a lifetime of rental serfdom and permanent subservience to the state, or big capital, or both.
