Who gains and who loses with high house prices?
High house prices are demanded by foolish Ponzis, enjoyed by real homeowners, and favored by politicians pandering to both groups.
Why are high house prices the keep rising considered a universal good? Does everyone benefit if house prices are high and keep moving higher? When house prices move up faster than wages, who benefits, and who pays the price?
Most people accept the idea that ever-rising house prices are good, and that a decline in house prices is bad. This idea seems to only apply to housing because ordinarily people cheer when the price of an essential product goes down, and complain when it goes up. Why is housing so different?
Gasoline prices over the last few years yo-yoed between $4 and $2.50. Most people felt good about the drop from $4 to $2.50, but when price went back up, they were annoyed. Why is that?
Most people have to consume a certain amount of gasoline each week to commute to work, drive to the grocery store, and live life. Lifestyle gasoline consumption doesn’t vary much based on the price, so when prices go up, people spend more, and when prices go down, people spend less.
The problem is that most people’s income doesn’t fluctuate with gas prices, so if they spend more on gasoline, by necessity, they spend less on everything else. Higher and rising gas prices reduce the amount people have available to spend on other goods and services, which benefits gas companies (and foreign oil producers) at the expense of all other industries.
So why is it viewed differently with home ownership?
When house prices go up, the owner of that house accumulates equity. Rising home prices may prompt a few additional expenditures because homeowners feel “rich,” the traditionally defined wealth effect. However, it wasn’t until lenders provided unfettered access to equity through home equity lines of credit and cash-out refinancing that the wealth effect balloon into the monstrous, greed-induced, free-money orgy it is today.
The simple fact is people want higher house prices because they want the financial gain of owning an appreciating asset. Nothing more.
What is so bad about using a home equity line of credit? What is wrong with spending the free money from the appreciation fairy?
The problem is that this money is not free; debt must be repaid. While the economy may benefit from infusion of cash and the resulting spending in the short term, the repayment of debt with interest pulls money out of the economy because the borrower no longer has this money available from their income to purchase other goods and services.
Some people live from one infusion of debt to another, spending most of their income on debt service and repayment. At the extreme this devolves into Ponzi borrowing where people borrow from one lender to repay another, spiraling downward and imploding once borrowers runs out of lenders foolish enough to sustain the Ponzi scheme.
High house prices that keep rising higher is not a benefit to borrowers who rely on rising house prices to support their personal Ponzi schemes because these borrowers end up losing their houses and endure the unceremonious fall from entitlement when their lenders cut them off.
High house prices that keep rising higher certainly don’t benefit buyers who must pay higher and higher prices to own their homes. They bear all the costs but obtain none of the benefits — at least until future buyers push prices even higher.
If it’s too good to be true, it probably isn’t true or good. High and rising house prices are not the panacea everyone imagines.
By Emily Badger, August 10
The small community of Brisbane, Calif., just south of San Francisco, has a rare opportunity that advocates argue could help ease the region’s massive housing crisis.
The town is home to a 684-acre plot of former industrial land. A developer wants to clean it up and build a mixed-use project, with public parkland, that could include more than 4,000 new units of housing. And the site surrounds a stop on the regional rail line that connects workers to jobs in San Francisco and Silicon Valley.
It’s exactly the kind of flat, spacious, hard-to-find place where you’d want to drop new housing in the Bay Area without displacing current residents or exacerbating traffic. But many Brisbane officials and residents prefer a plan for the land that would include no new housing at all. As the San Jose Mercury News recently reported:
A 2015 community survey found that 43 percent of Brisbane residents opposed any housing on the site, while just 2 percent favored 4,000 units or more. The survey found residents were far more concerned about preserving open space and their quality of life than adding “housing that working families can afford.”
This is unconscionable to people trying to solve a housing and transportation crunch that has turned the Bay Area into a gridlocked and gated community where local teachers can’t afford to live. And the Brisbane episode is a more extreme version of a plot line that keeps popping up, as individual towns stymie efforts to address what is a regional quandary.
Whenever a family buys a new house, the builder constructed that house only because no local opposition group was strong enough to prevent its construction; however, once new homeowners move in, many of them immediately adopt the belief that traffic congestion is out of control and any new development will ruin the character of their neighborhood, so these nimbys band together to prevent others from obtaining the same benefit they enjoy. Through willful ignorance, these new homeowners fail to comprehend the hypocrisy of this attitude and behavior.
… communities to ignore the externalities they create — as Brisbane, for example, forces more housing burden onto surrounding communities, or forces workers who’d like to live by the train if more housing existed there to feed highway traffic instead. …
This chart from Census researchers shows how much more fluid a city’s population is than the notion we normally have of its “residents.” The green here represents people who work in a city but don’t sleep there; the purple people who sleep in a city but don’t work there:
The green group seldom factors in housing decisions made by existing residents (which is how you wind up with Silicon Valley towns that have added thousands of new jobs but scant new housing, and tech commuter shuttles that anger communities 50 miles away). That chart also doesn’t capture all of the people who might like to move to a place or were displaced from it.
Planners often try to project how a community will grow in the future, but those theoretical future residents have little voice in political fights over what happens today.
One solution to this challenge is to make decisions at larger geographies that might capture more of the people we want to make policy for, as well as more of the policy goals that play out regionally (like reducing congestion, easing housing costs, enabling economic mobility). California Gov. Jerry Brown, for instance, has controversially proposed to streamline statewide decisions that are normally made at the local level about approving new developments that would include affordable housing. …
Local control is a bedrock principle in American communities, and to suggest its downsides is verboten (as Jerry Brown has discovered). But even without scuttling it entirely, it’s fair to expect communities to own up to who they’re really creating policy for — and who is left out.
Solving the problem of insufficient supply doesn’t require an innovative solution: it requires political will. If we want to provide affordable housing to the next generation, there are Two strategies for more abundant and less expensive housing, and the result of both strategies would allow builders to produce enough housing to accommodate the need. In short, we must build our way out of this problem.
Allowing builders and developers to increase supply would solve California’s housing problems. If we don’t allow more supply to come to market, people will substitute down in quality further and further merely to obtain a place to live, lifting house prices at every level of the housing ladder and pricing out the lowest tier of the housing market. California is already the least affordable housing in the US, and this problem will only get worse.
California may never have affordable housing; it certainly won’t as long as all development approvals are 100% determined locally. The problem of NIMBYism and the desire of each homeowner to be the last person to move into their neighborhood will cause this problem to get worse and worse over time.