1
Introduction
A remarkable transformation is occurring in advanced capitalist economies. Home ownership and housing more generally is becoming unaffordable for large swathes of citizens. In nearly all advanced economies since the early 2000s, the ratio of house prices to incomes has increased significantly above its long-term average (figure 1.1). The financial crisis of 2008–9 led to a fall in the ratio, but it has rebounded sharply since 2013.
Anglo-Saxon economies – where home ownership is deeply embedded in the culture – have been particularly badly affected. In big cities such as London, Manchester, Sydney, Melbourne, Auckland, Vancouver, Toronto, Los Angeles and San Francisco, median house prices have risen to over 7 times median incomes – with 3 times generally seen as ‘affordable’.1
Figure 1.1. House price-to-income ratio indexed to long-term average in 15 advanced economies since 1981
Source: OECD Analytical house prices database.
Note: data for UK only available since 1987.
The hardest hit have been younger adults: the ‘millennials’. In the UK, for example, in 1996 two-thirds of 25–35-year-olds on middle incomes owned a home; by 2016, this had fallen to just a quarter.2 In the United States in 2004, almost 45% of the same age group were home owners, a figure that dropped to 35% by 2016.3 In Australia, home ownership among the under forties declined from 36% in 2001 to 25% in 2015.4
The foundational promise of liberal capitalist economies that ‘if you work hard enough you can have a home of your own’ no longer holds true. There have been major falls in the levels of home ownership since the turn of the century across all the major English-speaking economies, as shown in figure 1.2.
Figure 1.2. Home ownership in Anglo-Saxon economies since 1980 (share of all households)
Sources: US Census Bureau; English Household Survey; Australian Census Bureau; New Zealand Census; Statistics Canada.
Rising house prices would be less of a problem if housing rents were more stable. But rents are also eating up an increasing share of household incomes. In the UK in the 1960s and 1970s, renters spent about 10% of their income on housing; by 2016 this had risen to 36%.5 In the US cities where jobs are most easily found, there have been large increases in recent decades. In New York City and San Francisco, for example, rents increased from about a quarter of median incomes in 2000 to almost half (42% and 46% respectively) by 2016.6 Meanwhile, 51% of renter households in the nation’s nine largest metropolitan areas pay more than 30% of their income – the standard maximum ratio for affordability – on housing.7 Saving for a deposit to buy a home becomes virtually impossible under such conditions.
The social, economic and political consequences of this housing affordability crisis are profound. Cities are becoming increasingly unaffordable for key workers such as nurses, teachers, police and younger people in the early stages of their careers. Suburban gentrification is rife with large swathes of urban areas cleansed of lower income workers and families forced to leave areas they may have occupied for decades, threatening the fabric of communities.
The rising cost of housing is creating new spatial and demographic cleavages in society. Those lucky enough to have bought homes in the 1970s and 1980s in English-speaking countries have seen their net wealth (their total assets minus their debts) expand at a much faster rate than real wages. In the early 2000s in the UK, for example, house price growth was so great that 17% of working-age adults earned more from house price gains than from their jobs in many years.8 In contrast, those born in the 1980s and 1990s have seen their wealth stagnating. They instead face a Hobson’s choice of permanent renting in often insecure and lowquality housing or getting themselves into debt with huge mortgages many times their annual income, which require a lifetime to pay down. A study of Australia’s two major cities in 2016 found that, in Sydney, 42% of average disposable income was swallowed up by monthly mortgage payments on a median-priced house in the capital, whilst for Melbourne the figure was 37.1%.9 Increasingly, it is impossible to get on the housing ladder without a helping hand from the ‘Bank of Mum and Dad’, with worrying consequences for social mobility and equality of opportunity.
Recent historical research shows financial returns to property have outstripped other forms of financial investment, including equities, since the 1950s.10 Indeed, since the 1970s, wealth accumulation in many capitalist economies has largely been driven by increases in property prices via capital gains, rather than increases in profits from the production of goods and services. It is this dynamic that lies behind Thomas Piketty’s11 much quoted work on the wealth-to-income ratio rising rapidly in capitalist economies back to Victorian-era levels. This is a form of ‘rentier-capitalism’, where life chances are determined not by hard work, innovation or entrepreneurial endeavour but simply by whether one is lucky enough to own a piece of land in the right part of the country.
These developments also have worrying implications for financial stability. Household debt-to-income ratios have risen to record historical levels in many advanced economies as people strain their budgets further to buy property. Such economies are more vulnerable to economic shocks and house prices falls, and central banks have less flexibility to adjust interest rates, in particular when mortgages are not fixed.
How did we get here? The explanation you will most likely hear in the media and from many politicians is that we are not building enough homes. The culprits are usually the planning system, the construction sector or excessive immigration. Whilst these are certainly relevant factors in many countries, they are not so useful in explaining the housing affordability crisis of the last few decades shown in figures 1.1 and 1.2. Planning systems did not suddenly become more restrictive at the turn of the century or construction firms more monopolistic. House prices have been rising even in cities with stable populations.
To understand today’s housing crisis, we must go beyond just looking at the supply of housing and examine demand, in particular the demand for housing as a financial asset and land as a form of collateral. And looking at the demand for housing and the land underneath it leads us to consider much bigger questions about the social and economic structure of modern capitalist economies.
In particular, the increasing political preference for home ownership over other forms of tenure, coupled with wider shifts in political economy, have led to two important – and perhaps unintended – developments in the housing and land market. Firstly, the windfall gains that naturally accrue to landowners in a growing economy – generally referred to as ‘land rents’ – have been allowed to grow as taxes on property and the public provision of affordable housing have both withered. Secondly, and most significantly for explaining the rises in house prices in the last two decades, the deregulation of the financial system has created a positive feedback cycle between finance and house prices. Finance has become addicted to property just as citizens in many capitalist economies have come to expect to own a home. Underlying and perpetuating both these developments has been a failure of economic theory and policy to conceptualize the role of banks and land in the economy.
In this sense the housing crisis is about much more than just the housing market: it lies at the epicentre of the crisis of modern capitalism. To end it, radical structural reforms will be required to economic and public policy, including how we shape the market for land and regulate the financial system.