If, like me, you are in your early twenties you might feel that you’re disadvantaged in the housing market. Your parents could probably buy a place to live much cheaper than you can and almost everyone their age has seen their homes appreciate in value over the last 15-20 years. Renting has become more expensive too, at least in large cities which is where the opportunities are. I can’t provide the answers for how to fix this but I can help you understand why and why it is unlikely to change.
There are two reasons why housing is and will stay expensive for young people; one is simple economics, and the other is political. Housing prices are determined by supply and demand, as most prices are in capitalist economies, and therefore the obvious answer to giving affordable housing to the people is just to build more. While that is the solution reality is more complex and there are some obstacles to building more affordable housing.
Firstly, let’s examine why the private sector doesn’t supply enough affordable housing. The problem is that affordable housing is cheap which means lower margins than up-scale housing, and therefore the profit-maximising move is to primarily build more pricey homes. There are of course ways to fix this problem, mainly through state intervention, but the core problem of maximising profits versus maximising societal utility is very difficult to amend. Speaking of state intervention, why doesn’t the state just build affordable housing?
There are two reasons why the state doesn’t simply build affordable housing, accepting any eventual losses for the good of society. One reason is that social housing are seen by some as unwanted as it can create stigmatised areas of social housing which are only for the less well off. The other reason is arguably more interesting and more relevant to one of the blog’s main focus’: political economy. Most advanced economies are democracies and the average age is somewhere in the 40’s. Thus the average voter is middle class in their 40’s, which usually means having a family and owning their own home. If a government were to try to incentivise building more then that would through the mechanics of supply and demand probably have a negative effect on average housing prices, effectively then lowering the prices of most voters’ (and households’) most expensive asset. This would obviously be unpopular and aggravating 40-something middle class voters is an almost guaranteed way to ruin chances for re-election.
Is this a reasonable analysis, or do you have different views? Please share your thoughts on Twitter, and if you enjoyed this blog post you might be interested in this piece about why millennials are facing tougher odds than previous generations. Feel free to bookmark the blog and come back next Sunday night for next week’s blog post.
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