What’s wrong with the housing market? How can we fix it?

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John Maynard Keynes was a famous economist who is widely regarded as the father of modern-day macroeconomics. He believed in a mixed economy which was embodied mainly by the private sector but supported government intervention to a certain extent such that the state, accountable for protecting societal welfare, would provide assistance and intervention in times of recession and regulate the market to stability. This was a profound and ingenious proposition which became one of the pillars of economic thought we now know as Keynesian economics. These same beliefs can be applied to the present-day workings of the housing market, which, many economists argue, is in the midst of a crisis.

Shelter is a basic human need that housing provides. It is almost as essential to one’s survival as food or water, but the current state of the housing market that even our basic human need for shelter is not being met in some cases due to steep market prices of housing and rent, particularly in areas of high economic activity. A country faces a housing crisis when a significant amount of the country’s population is unable to afford a home that can accommodate them and all their needs. All across the world, the lack of affordable housing to buy or rent is fueling an inevitable housing plight. The housing problem has affected millions, if not billions, of people worldwide. In Britain alone, according to an analysis by Shelter, more than 17.5 million people are in a situation where their home is either unsafe, unfit, or unaffordable because of the housing problem. This number increases to 22 million when you factor in the children that are affected by the situation.

The primary cause for the housing market crisis is the lack of new homes being built. Variable circumstances and states of affairs across the world has contorted the problem into various shapes and forms in different countries, but the crux of it remains constant. In the UK in particular, the problem was caused by policy changes brought about by the Margaret Thatcher Government in 1980. Prior to the policy change, about a third of the populace of Britain lived in social homes — which were homes provided to people by their council at reduced rents. This served as a good alternative for people who were otherwise unable to buy or rent their own home. Under the vision of promoting homeownership, Margaret Thatcher’s government boosted an existing scheme to help people living in council homes to buy their homes at discounted rates. Council homes began to sell quickly which reduced the proportion of homes owned by the council. The adverse effect the scheme had was that the council was generating less revenue from rent, which meant they could finance the construction of fewer homes. The ease of obtaining a mortgage due to the quickly growing UK economy was the adjunction that multiplied the pace at which homes in the UK were being sold. People also began to buy properties for the sole purpose of renting them out. Then came the great recession, which forced hordes of people out of their homes and onto the streets in 2007. Contractors were quick to lose confidence in the housing market as they saw their money sink down the drains. Though, the high margins builders see from the sales of luxury and high-end real estate was enough to sway them to build enough of high-end homes to amply accommodate for the needs of the wealthy, the low margins on affordable housing were not enough incentive to cater for lower and middle-income households’ demands. Only at a time when the prices of houses across the world have gone up beyond a threshold such that they can no longer be labelled as “affordable” do builders have enough incentive to justify the investment; contractors and buyers of homes are struggling to find an equilibrium where both parties can be satisfied. Other countries have followed a similar path to the modern day where the housing crisis is a prevalent issue across the globe.

A shortage of land, materials, and labor are identified as other major causes of the housing crisis. These are all significant inputs into the construction of a home. Insufficient supply of the aforementioned factors of production would mean increased costs — further reducing builders’ margins and incentive to build affordable homes. Specific raw materials that go into building a home like softwood lumber have been largely inflated in recent times. Trade relations with countries like Canada

and China where most of the raw materials that go into building a house come from, may also influence the prices of these raw materials. The shortage of workers with the specialized skills required for construction are also in short supply. Builders are finding it increasingly difficult to find and attract such workers with these specialized skills are more and more people are forming a preference to go into blue collar jobs and further education. Land is also under significant pressure and in short supply, especially in urbanized areas. The availability of land, along with gaps in the labor force and costs of production tend to be some of the major drivers of the costs of homes.

It is also important to explore the fact that the inability of consumers to afford homes mainly stems from the fact that not only is the cost of housing, in most countries, growing at a rapid pace, but that its growing faster than people’s incomes. According to data by the International Monetary Fund (IMF) — in countries like New Zealand, Denmark, Australia, and Estonia, real house prices have grown upwards of 10–20%, but the increase in real household incomes. The same applies for countries all over the world, with the few exceptions being developing countries like India, Philippines, Peru, Malaysia, and Morocco. Further, data also shows that the same countries with increasing household incomes are the ones seeing increases in house prices. This shows that houses are one of the first things that people tend to look to buy as their incomes increase. Therefore, it’s apparent that demand for housing has been increasing rapidly across the world, in part, due to the rapidly expanding economies. But supply of homes is not able to keep up, across the world. It is a common theme that more houses are being sold than built.

As we can see, there are a vast number of problems that lead up to the housing crisis. Therefore, policymakers must address many challenges to remedy the host of issues that are feeding into the crisis.

  1. Land use laws — Changes to land use laws are widely regarded as some of the best and most efficient ways to address the housing crisis. The value of land tends to increase over time as economic growth and increases in population create more pressure on the same fixed amount of land, pushing out aggregate demand for the good. Increasingly, the wealthy have been aiming to procure land as an investment to accumulate wealth rather than use it for the construction of houses. Land isn’t a simple good that can be purchased without any legal framework. Thus, state involvement is necessary. Policymakers must take it into their own hands to ensure that the resource is being used in the most economically efficient way possible. One way to do this is to alter compulsory purchase laws, which allow the state to reacquire land from private entities for adequate compensation, such that it is easier for public authorities to purchase land at lower, but fair prices so that this land can be used for the development of infrastructure and housing. It is to be noted though that wealthy, land owing voters are unlikely to like such a policy change because the government would be acquiring their assets at lowered prices whether they will it or not.
  2. Policies to reduce costs of production of homes — The bulk of the investment into building a home is derived from the costs of land, labor, and materials. Supply of labor is unpredictable due to the human component of the factor of production. There are often gaps in the labor force due to the lack of workers with the skills required for construction. One solution is to set up training for workers of the country, particularly in areas of high unemployment. This would not only help fill up the gap in the labor force with domestic workers, but also provide them with the skills to procure jobs on their own in the future, thus reducing overall rates of unemployment in the country. An alternative to this is for policymakers to implement relaxed immigration laws so that workers coming in from other countries may be of productive use to the economy and help fill the gap in the labor force with their skills instead. Materials are the other major input into the construction process of homes. To cut costs of building homes by reducing the costs of the materials that go into it, it would be wise for policymakers to invest into innovation grants or tenders. This would help promote innovation among the general public, and potentially find low-cost, eco-friendly alternatives to materials used in the construction of a home. This approach has worked very well in India, where researchers at the Indian Institute of technology at Madras have discovered a a new building system that uses low-cost, prefabricated panels made from waste material which has been approved by the government and is expected to cut the cost of building homes.

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**Essay written for John Locke Essay contest