Thursday, January 30, 2020

Trends in the global housing market

A few takeaways from a very good survey of housing in the Economist. The overarching message is that there is nothing inherently superior to owner-occupation over renting of houses.

On the importance of housing in causing economic recessions,
From the 1960s to the 2000s a quarter of recessions in the rich world were associated with steep declines in house prices. Recessions associated with credit crunches and house-price busts were deeper and lasted longer than other recessions did.
And even populism,
Housing markets and populism are closely linked. Britons living in areas where house prices are stagnant were more likely to vote for Brexit in 2016, and French people for the far-right National Front in the presidential elections of 2017, according to research from Ben Ansell of Oxford University and David Adler of the European University Institute.
The report blames three factors and points to the way forward,
Since the second world war, governments across the rich world have made three big mistakes. They have made it too difficult to build the accommodation that their populations require; they have created unwise economic incentives for households to funnel more money into the housing market; and they have failed to design a regulatory infrastructure to constrain housing bubbles... flexible planning systems, appropriate taxation and financial regulation can turn housing into a force for social and economic stability. Singapore’s public-housing system helps improve social inclusion; mortgage finance in Germany helped the country avoid the worst of the 2008-10 crisis; Switzerland’s planning system goes a long way to explaining why populism has so far not taken off there.
Post-war public policy has helped fuel the home-ownership boom, 
In a research paper √íscar Jord√†, Alan Taylor and Moritz Schularick describe the second half of the 20th century as “the great mortgaging”. In 1940-2000 mortgage credit as a share of GDP across the rich world more than doubled. More people clambered onto the “housing ladder”. America’s home-ownership rate rose from around 45% to 70%; Britain’s went from 30% to 70%... In the 1950s and 1960s governments constructed large amounts of public housing, in part to rebuild their cities after the devastation of the second world war. Yet at the same time many of them tightened land regulation, gradually constraining private builders... According to calculations by The Economist, the rate of housing construction in the rich world is half what it was in the 1960s. It has become particularly hard to build in high-demand areas. Manhattan saw permission given to 13,000 new housing units in 1960 alone, whereas for the whole of the 1990s only 21,000 new units were approved.
As ownership has surged and regulations have started to bind, prices have risen, making housing the largest global asset class,
Regulations have been driven by public incentives,
In 2001 William Fischel of Dartmouth College proposed his “homevoter hypothesis”. The thinking runs that owner-occupiers have an incentive to resist development in their local area, since doing so helps preserve the value of their property. As home ownership rises, therefore, housing construction might be expected to fall.
This and other public incentives have driven distortionary regulations,
To get a sense of why London has such expensive housing, visit Tottenham Hale. You might expect that, next to an Underground station where central London is accessible within 15 minutes, there would be plenty of houses. In fact, there is a car wash. The land on which the car wash sits is officially classified as “green belt” land, which means that building houses on it is almost impossible. Across just five big cities in England there are over 47,000 hectares (about 116,000 acres) of similar land, which is not particularly green, is close to train stations with a good service to their centres, and yet cannot be built on. That is enough space for over 2.5m new homes at average densities. For decades the green belt was sacred. The British public imagine it, wrongly, as idyllic pasture where horses drink from streams. Politicians dared not talk about it.
The contrasting stories of Singapore and HongKong, and different parts of America, illustrate the point about regulations,
Singapore has a fairly elastic planning system. The government owns most of the land. When house-price growth is too strong or the population is rising quickly, the state can release extra land faster than a barman at the Raffles hotel can mix a Singapore sling. In Hong Kong, by contrast, the supply of developable land is controlled by a small clique of oligarchs. What will buy you a cramped bedsit in Hong Kong will buy you a decent-sized pad in Singapore. It is a similar story in America. The part of the country with the most elastic housing supply, Pine Bluff, a midsized city in Arkansas, has an average house price of $90,000. The cost of a house in one of the most restrictive parts, San Luis Obispo in California, is $725,000, even though building costs across America do not vary much.
The evidence in this regard is rich,
Academic research supports the circumstantial evidence. Christian Hilber of the London School of Economics and Wouter Vermuelen of cpbNetherlands Bureau for Economic Policy Analysis found that if south-east England (the wealthiest and most regulated region) had been as open to new construction as the north-east (the least regulated), house prices in the south-east would have been 25% lower in 2008. Edward Glaeser of Harvard University finds similar results for parts of America... The loosening in global financial conditions since 2000 has certainly pushed up house prices—as have low unemployment, high immigration and the rise of platforms such as Airbnb, which divert home ownership away from ordinary people. Prices have not risen because building has suddenly became vastly more difficult. At the same time, however, the long-term rise in house prices is largely down to constrained supply. And if builders struggle to erect new dwellings quickly, a given increase in demand is largely channelled into price rises. Giovanni Favara of the Federal Reserve Board and Jean Imbs of the Paris School of Economics find that, though looser finance has led to higher house prices, that was true “to a lesser extent in areas with elastic housing supply, where the housing stock increases instead”.
On the regulatory systems,
Broadly speaking, three types of planning systems exist across the rich world: discretion-based; autocratic; and rules-based. The first type is commonly found in Commonwealth countries. Local residents have plenty of power to stop development plans, and they frequently do. It may be no coincidence that those countries have in recent decades seen the fastest growth in house prices... Autocratic planning systems do a better job of boosting housing supply. Russia has raised its annual rate of housebuilding from 400,000 a year in the early 2000s to over 1m... The third group—rules-based planning systems—are commonly found in European countries such as France and Germany. If developers tick all the boxes then construction is permitted, even if local residents object. These systems have generally done a better job of delivering housing. Since the 1950s Germany has built twice the number of houses as Britain, despite having only a slightly higher population.
And taxation, specifically the Swiss system,
In countries such as Britain, though many taxes are levied at the local level, the proceeds are redistributed across the country. Local governments therefore see little economic benefit from allowing home construction, even as they must cope with the disruption. As a result they are unlikely to try too hard to override the NIMBYs. By contrast, in Switzerland local taxes stay where they are levied, so local governments have a fiscal incentive to allow development. The process for acquiring planning permission can be slow... But it is predictable. In the past century Swiss house prices have risen by less than those in any other rich country.
Highlighting the challenges of financial market regulation, the tightening mortgage lending standards on banks has led to regulatory arbitrage and the rise of shadow banks, whose share of mortgage lending has risen from just over a quarter in 2010 to nearly 65%!

In pure financial terms, given the ultra-low interest rates, there is a strong case that renting is cheaper than owning a house.

Public housing programs have been on the decline as governments have sought to replace housing provision with cash transfers so that poor people can rent the house of their choice from the market, a shift that may have had its unintended effects, 
In the early 1970s Britain started to wind down its programme of social-housing construction, but in its place gave money to poor tenants. France did something similar in the latter part of the decade. In Germany from the late 1980s, housing assets owned by municipalities were transferred to for-profit owners. In America between 1977 and 1997, the number of households receiving housing vouchers increased from 162,000 to over 1.4m. Though economists generally prefer cash benefits over the in-kind sort, a growing number are starting to argue that providing cash assistance for housing has not proven to be as effective as expected. Giving people money increases their purchasing power. In a normal market, the increase in effective demand leads suppliers to respond accordingly. Yet the supply of housing in many cities is inelastic: when demand for housing rises, extra supply does not necessarily follow. Instead, the price of housing—which, for most poor people, is rent—goes up.
In many cases, therefore, housing benefits help landlords as much as the poor. Some research in England has found that half of the gains from housing benefits accrue to landlords. A paper from 2006 looking at France concludes that a one-euro rise in housing benefits raises rents by 80 cents. If governments respond to rising rents by increasing housing benefits, costs can quickly spiral. Over the long run, cash payments for housing can even cost the government more than providing housing directly (though this is difficult to calculate reliably). Meanwhile, it is not clear whether the private sector is able to fill the gap when the state stops building houses itself. If not, then overall new housing supply falls, making it more expensive for everyone.
So, public housing seems to be making a comeback,
In 2018 Britain built more public housing than in any year since 1992. The South Korean government aims to increase the share of public-rental housing from 7% of the total stock to 9% by 2022. In Germany in 2018-19 the government set aside some €5bn ($5.6bn) to promote the construction of public housing.
This is one more example of how the general equilibrium effects of the so-called orthodox policies can turn out to be less than desirable. 

The first is better regulation of housing finance. Switzerland comes close to treating home-ownership and renting equivalently in its tax system, meaning that people are not encouraged to funnel capital into the housing market... German mortgage-lenders embrace an unusual appraisal technique. When assessing the value of a house, they rarely refer to market price; instead they consider “mortgage-lending value”, an assessment of the probable price of a house over the economic cycle. A report from the Bank for International Settlements, a club of central banks, suggests that by discounting short-term price fluctuations, this valuation technique can stop bubbles from forming...
The second group of reforms concerns transport. Until the mid-20th century, house prices were stable in part because the cost and ease with which people could get around improved roughly as quickly as economic growth. As getting from A to B became ever quicker, it increased the amount of developable land at an economy’s disposal. But after the second world war improvements in transport slowed, meaning that more and more people were fighting over the same amount of space. That caused house prices to rise. More recently, commuting times into the rich world’s biggest cities have, if anything, been lengthening, raising the premium of living near or in city centres. A better train and road network, then, would allow more people to live farther afield...
The third set of reforms concerns planning. This report has argued that governments are finally waking up to the fact that there is a structural undersupply of housing. They could learn from best practice internationally. Devolving taxes to the regional or local level, the norm in Switzerland, gives local governments a stronger incentive to allow development. France has followed the Swiss example in increasing pressure on local governments to raise revenue from property taxes, “which can in turn lead to efforts to stimulate land development”, according to the OECD. Abolishing single-family-home zoning, which prevents densification, is another good option—and something Minneapolis did last year. Boosting the construction of public housing is also welcome. Singapore, where 80% of residents live in government-built flats, is in some respects the model to copy. The state regularly renovates the buildings and, more controversially, promotes mixing of different sorts of people, to help prevent the emergence of ghettos.
Like with many things, Japan may be torch bearer for what can be done to make housing affordable,
In Japan a series of reforms in the early-to-mid-2000s loosened the planning system, allowing applications to be processed more quickly and giving residents more discretion over how to use their land. Tokyo’s rate of housing construction has risen by 30% since the reform; in 2013-17 Tokyo put up as many houses as the whole of England. Tokyo is a more jumbled city than most rich ones, but current zoning laws ensure that it is not quite as higgledy-piggledy as, say, Houston. In inflation-adjusted terms, house prices in the Japanese capital are 9% lower than they were in 2000, while in London they are 144% higher.

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