Planning, Not Home Ownership, Caused the Housing Crisis

Planning, Not Home Ownership, Caused the Housing Crisis, by Wendell Cox, principal of Demographia, an international public policy and demographics firm.

The Economist explains: “The soaring cost of housing has created gaping inequalities and inflamed both generational and geographical divides. In 1990 a generation of baby-boomers, with a median age of 35, owned a third of America’s real estate by value. In 2019 a similarly sized cohort of millennials, aged 31, owned just 4%.” …

OECD says of the middle-class that “there are now signs that this bedrock of our democracies and economic growth is not as stable as in the past.” The threat is indicated by the fact that costs of living are rising much faster than incomes. OECD places much of the blame on “house prices have been growing three times faster than household median income over the last two decades.” …

[The Economist again:] “Young people’s view that housing is out of reach — unless you have rich parents — helps explain their drift towards “millennial socialism”.

These concerns are understandable. Unlike previous generations, younger people, do not believe their futures will be better than that of their parents …

And the growth in housing prices is due to the growth in money supply, which is due to excessive money manufacture and increase in debt. The current system of creating money, with no constraint such as the supply of physical gold, is the root cause. So, the millennials are accidentally right — their economic woes are due to capitalism. Literally, in the way we manufacture money that represents capital.

There is also a second cause: bureaucratic planning, which artificially restricts the supply of housing and thus drives up the prices of houses (in the areas where the bureaucrats and policy makers live!).

In their rush to stop the spatial expansion of cities (pejoratively called “urban sprawl”) urban plans have imposed bans or serious constraints on new urban fringe housing. These “urban containment” policies typically include “urban growth boundaries,” “green belts,” and other strategies. As with any policy that seeks to regulate markets, there are consequences. …

Figure 2 shows price-to-income ratios at least doubling in Australia and New Zealand, where urban containment has become virtually universal. … In the US and Canada, the price-to-income ratios have risen, but less, because many markets have retained more liberal regulation …

Look at how efficient those bureaucrats down-under are!

The long term median price to income ratio is a touch under three, which is where it was in the 1980s when the present money bubble began. But look at Australian cities in the last three decades:

It’s a bubble awaiting a pin. And when the Australian housing bubble bursts, it may take our banks with it. Normally our banks have 25% of their loan book in residential housing, but CommBank’s is now around 70% and ANZ is not far behind.

All markets revert to their mean ratios eventually (note that the use of ratios steps around the effect of money manufacture and inflation in making currency worth ever less in absolute terms.) It’s not different this time. Only market distortion can prevent the housing price ratio returning to three, but that won’t last forever either. The market will eventually find a way of resolving this unstable situation.