Diane Coyle, in reviewing Rowan Moore’s book Slow Burn City: London in the 21st Century,
focuses on the idea that forever rising house prices could gradually
kill off what is now a vibrant city. As housing gets steadily more
expensive, getting people to work there will get more and more
difficult. In the meantime, young people who can afford to buy get
more
and more into debt. I wonder whether soon mortgage providers will
become more interested in the wealth of borrowers parents than in the
borrower’s own earning capacity. (This is not just a London problem: see here about New York for example.)
The reason for this that everyone focuses on, understandably, is
stagnant housing supply. However, housing can also be seen
as an asset. Just as low real interest rates boost the stock market
because a given stream of expected future dividends looks more
attractive, much the same is true of housing (where dividends become
rents). Stock prices can rise because expected future profitability
increases, but they can also rise because expected real interest
rates fall. With housing increasingly used as an asset for the
wealthy, or even as a way of saving for retirement, house prices will
behave in a similar way. A shortage of housing supply relative to demand
raises
rents, but even if rents stayed the same falling expected real interest
rates raise house prices because those rents become more valuable
compared to the falling returns from alternative forms of wealth.
That is why a good part of the house price problem comes from the
macroeconomy: not just current low real interest rates, but also low expected rates
(secular stagnation). The idea that house prices are tied
down by the ability of first time buyers to borrow (and therefore to
real wages or productivity, modified by changes in the risks lenders
were willing to take) seems appropriate to a world where the
importance of the very wealthy was declining, and most people could
imagine owning their own home. We now seem to be moving to a more
traditional world (remember Piketty) where wealth is more dominant,
and with low interest rates that may also be a world where renting
rather than home ownership becomes the norm for those who are not
wealthy and whose parents are not wealthy.
There may be factors behind secular stagnation (low long term real
interest rates) that we can do little about, but there are things we
can do right now that will raise interest rates, and thereby tend to
lower house prices. The most important of those is to stop taking
demand out of the economy through continuing fiscal consolidation
(aka austerity). This boost to demand that comes from ending fiscal
consolidation will allow central banks to raise interest rates more
quickly. While central banks may only be able to influence real
interest rates in the short term, because so much uncertainty exists
about what this long term involves the short term may have a powerful
influence on more distant expectations.
We can also have some positive influence on the longer term by
increasing public investment, including forms of public spending
(that may not be classified as investment) that encourage private
investment. It should also include building houses where (or of a kind) the private sector
will not build. That will have beneficial effects in terms of raising
real interest rates in both the short and longer term.
Ever rising house prices lead to unprecedented high levels of private
debt, and also destroy the dream of many young people to own their
own home. One answer is to build more houses, but another is to run
better macroeconomic policies. That house prices continue to rise
during a period of fiscal austerity is not an anachronism. It is not
a bug but a feature of an age of austerity.
