Smart-growth land-use controls are creating a generation of renters and result in “social and housing apartheid,” say economists Shamubeel and Selena Eaqub. Writing from and about Auckland, New Zealand, they note that, since 1995, the cost of developable land has risen 73 percent faster than incomes (p. 52).
They admit that demand has played a role in housing prices, but not the principle role. “Over time, house prices can fluctuate considerably, but, in the normal scheme of things, only in a transitory way,” they write. “Prices will rise to signal the market to make more houses and then fall back when supply matches demand. But house prices can rise continuously, relative to incomes and rents, if there are physical or regulatory constraints that stop supply” (p. 51).
Like many other coastal cities, Auckland cannot expand in all directions. But that doesn’t mean there is a physical shortage of land. The problem is “not that land is in limited supply, but that we hardly use any of the land that is already there” (p. 52).
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“The scarcity of land is entirely artificial,” they point out (p. 52). “Rules and principles originally designed to make cities better places by stopping bad things from happening have now become the shackles that are preventing cities from reaching their potential” (p. 53). New Zealand is slightly larger than Oregon and has a few more people so its density is less than 44 people per square mile compared with 40 in Oregon. Oregon is less than 1.5 percent urbanized, so New Zealand’s degree of development is probably comparable.
Is there anything wrong with Millennials becoming a generation of renters? According to Reid Cramer of the centrist New America Foundation, Millennials who don’t buy homes fail to build wealth and short-change not only themselves but the economy as a whole.
The bad news is that Cramer advocates something called “shared-equity homeownership” in which someone subsidizes their home purchase and then, when they sell, they must share the capital gain with the subsidizer. This reduces the buyer’s long-term wealth and effectively enables the kind of land-use regulation that makes housing unaffordable in the first place. The good news is that, despite media claims, Millennials really do want to buy homes, and they’ll probably do it conventionally, not through shared-equity.
In any case, the Eaqubs’ book shows that the problems faced in California, Oregon, Washington, and other states with smart-growth laws are found in other countries as well. More important, there are people in those countries who recognize the problems and are fighting against them.
“Is there anything wrong with Millennials becoming a generation of renters? According to Reid Cramer of the centrist New America Foundation, Millennials who don’t buy homes fail to build wealth and short-change not only themselves but the economy as a whole.”
How much of this is due to “physical or regulatory constraints that stop supply” and how much is due to student loan burden and limited economic opportunities? How much is due to the need for freedom and flexibility to move given a volatile job market and the need to relocate for work?
Does buying a house really build wealth? I’m skeptical. First, one needs to have built wealth to buy a house. A $300,000 home is going to require a $60,000 down payment to avoid the cost of mortgage loan insurance. Buyers will also need to have accumulated wealth to pay for a housing inspection, closing costs and other fees, and renovations/repairs needed after purchase.
If an owner stays in a house long enough, it may appreciate in nominal value, but when factoring interest paid and inflation, does a house appreciate in real terms? Add in repairs/depreciation due to deterioration, insurance, and taxes over time, and I’d wager many houses are a net expense.
The economy as a whole is being shortchanged not by the lack of millennial-purchased houses. It’s being shortchanged by monetary policy that lures get-rich-quick speculators and creates extreme volatility in housing prices.
The Case-Schiller Home Price Index, which goes back over 100 years, generally parallels the CPI in the long run. So, despite anomalies like California, housing values remain constant in real terms. Schiller has stated that purchasing a home is a life-style choice, not an investment. In particular, to keep a house’s value, one must continually invest additional monies in repairs, remodelling and upgrades. These expenditures will amount to as much as the original house price.
I have been living in my current home for 31 years, and Schiller’s comments reflect my own experience. In the 40 years before I moved to my “new” home, I was seldom in any place for more than a few years, and much of that time I rented.
The millenials may be too much in debt to buy homes, and their incomes may be too small, also. But there is more going on. Working class people have seen a substantial decline in real income over the last 30 years or so, and middle class incomes have also declined. The rich, of course, get richer. There has also been a decline in labor force participation, although some of that is due to retirements.
It would seem that growth in the GDP is not keeping pace with growth in population, and that there is less stuff per capita to go around. Could the per caput GDP be actually declining in real terms?
No.
Ensuring generational “buy-in” to the community is an important factor in perpetuating a healthy community. Urban Growth Boundaries limit the ability for those just starting out to invest, and purchase a home on the fringes of the community, offering them little opportunity to build wealth, become established, and start a family. If younger generations are not able to “buy-into and invest in a community there is little reason to stay and invest in the community that doesn’t value their contribution.