A remarkable transformation is occurring in advanced capitalist economies. Home ownership and housing more generally is becoming unaffordable for large swathes of citizens. Anglo-Saxon economies — where home ownership is deeply culturally embedded — have been particularly badly affected. In big cities such as London, Manchester, Sydney, Melbourne, Auckland, Vancouver, Toronto, Los Angeles and San Francisco, median house prices have risen to over seven times median incomes — with three times generally seen as ‘affordable’.
The hardest hit have been younger adults: the ‘millennials’. In the UK, for example, in 1996 two-thirds of 25-35 year-olds on middle incomes owned a home; by 2016, this had fallen to just a quarter. In the United States in 2004, almost 45% of the same age group were home owners, a figure that dropped to 35% by 2016. In Australia, home ownership among the under forties declined from 36% in 2001 to 25% in 2015.
The foundational promise of liberal capitalist economies that ‘if you work hard enough you can have a home of your own’ no longer holds true. There have has been major falls in the levels of home ownership since the turn of the century across all the major English-speaking economies, as shown in the chart below.
How did we get here? The explanation you will most likely hear in the media and from many politicians is that we are not building enough homes. The culprits are usually the planning system, the construction sector or excessive immigration. While these are certainly relevant factors in many countries, they are not so useful in explaining the housing affordability crisis of the last few decades shown in the chart above. Planning systems did not suddenly become more restrictive at the turn of the century or construction firms more monopolistic. House prices have been rising even in cities with stable populations.
To understand today’s housing crisis, we must go beyond just looking at the supply of housing and examine demand, in particular the demand for housing as a financial asset and land as a form of collateral. And looking at the demand for housing and the land underneath it leads us to consider much bigger questions about the social and economic structure of modern capitalist economies.
In particular, the increasing political preference for home ownership over other forms of tenure, coupled with wider shifts in political economy, have led to two important — and perhaps unintended — developments in the housing and land market. Firstly, the windfall gains that naturally accrue to landowners in a growing economy — generally referred to as ‘land rents’ — have been allowed to grow as taxes on property and the public provision of affordable housing have both withered. Secondly, and most significantly for explaining the rises in house prices in the last two decades, the deregulation of the financial system has created a positive feedback cycle between finance and house prices. Finance has become addicted to property just as citizens in many capitalist economies have come to expect to own a home.
Money creation, bank lending and house prices
When property prices rise faster than incomes........