Living in a nice house leads to spending or saving | Solving society's problems II
Housing and purchasing power
Keywords: affordable housing, coöperative or collaborative housing, net worth, debt, expenses, wealth effect, purchasing power, asset, investment vehicle
When I wanted to write about the housing crises around the globe someone on youtube beat me to it and with a lot more detail than I would’ve done. I recommend you watch it, if you haven’t already.
However I will still be going through my thoughts and how I see it.
As a human we have a basic need for and a right to food, housing, healthcare and education. In the Netherlands and a lot of other Western and Northern European countries basic food isn’t as expensive, we have affordable basic healthcare and free (public) education and affordable education from 18 years old onwards. That leaves (public) housing. Our country is a special case, because our ability to build houses is also hampered by nitrogen policies, because we generate too much of it, which isn’t good for nature and the biodiversity.
So why do we need to build more houses?
Through the act of having actual purchasing power and by not having much debt. Not necessarily indirectly through the wealth effect, read below. I read a lot of information about business, finance and money. But articles, video’s and books about money in particular mention that the three biggest expenses of an average person are housing, transportation and food. You can quickly search for that online. So if housing is affordable, you can spend more money on other things in the economy.
Also through something called the wealth effect, the economy of your country would benefit from it. From Wikipedia:
“The wealth effect is the change in spending that accompanies a change in perceived wealth. Usually the wealth effect is positive: spending changes in the same direction as perceived wealth.”
“Changes in a consumer's wealth cause changes in the amounts and distribution of his or her consumption. People typically spend more overall when one of two things is true: when people actually are richer, objectively, or when people perceive themselves to be richer—for example, the assessed value of their home increases, or a stock they own goes up in price.”
If you have affordable housing, people won’t have much debt, which means their net worth can increase in a shorter amount of time, which through the wealth effect means they will consume more.
If people would own other assets of your country, like companies, through something called a sovereign wealth fund, then this could also illicit a wealth effect: Fiscal policies and wealth ownership to prosper society | Solving society's problems VI
The youtube video mentions other topics, poverty, homelessness, climate change, public health, economic decline, population decline, crime and global security. The topics poverty and economic decline come close to what I discussed and I don’t necessarily agree with the other topics, but those I mentioned were my main points.
On to how to solve the housing problem.
Put a priority on the fact that it’s a crisis and at the top of the other ones, like they did in Singapore. Because it affects people’s daily lives much more than anything else, it’s one of the three major expenses after all.
Singapore has around 90% homeownership and about 80% live in public housing. However your government and regulations needs to be well organized for that amount of public housing to succeed. As the next video will show towards the end, if you only focus on non market housing like in Hong Kong and limit private development, that will put too much pressure on non market housing.
Also by focussing more, but not solely on, non market housing, coöperative or collaborative housing. You can go a long way. The two video’s explain it well. The gist of it is, because there is no profit incentive, the price for a house can be as low as possible and that means the private sector will have to compete with those low prices, driving their prices down as well. But that can partially be negated if local and especially foreign buyers only see (private) houses as an investment vehicle.
Before I got into that one more solution for more houses. Implement a 4 day workweek and work from home policy. This will reduce and consolidate the demand for office spaces, so the empty buildings can be converted to houses or apartments, for a relatively cheap cost because you don’t have to build houses from scratch. Implementing a 4 day workweek with a WFH policy to solve the housing crises will have multiplicative gains and secondary benificiary consequences for society, because both have far reaching effects. For other reasons why a 4 day workweek is helpful, see my post: Work, problem or solution? | Solving society's problems I.
When local and foreign buyers see houses as an investment vehicle, it turns into an ordinary commodity, on top of which you can also speculate on, that can result in driving up the price, because of the shortage, exacerbating the problem. For example, the 2008 housing bubble and crises, that the video mentions as well. I’ll just quote the first two solutions for the local asset markets, i.e. houses.
“1. Capital controls for speculative capital”
“2. Prevent bubbles from arising”
You can limit the number of homes each person owns, by for example making them pay a larger tax when they purchase another home. Also make it harder for foreign people to own property, because you want to serve the needs of your citizens first, but not make it impossible for other people. And even harder for local and foreign corporations, because they only see it as a commodity on which they can profit from.
In conclusion, help your population and your economy, by putting priority on building more houses, also more non market houses, like public and coöperative housing. Finally, limit the fact that you can treat housing as an investment vehicle.
Edit: A cool new video came out about one of my favorite youtube channels. He talks about the causes and possible solutions to the housing crisis.
In short: 1. Construction failure, 2. Excessive speculation, 3. Financialization of housing. The cause depends on the country your in, but for most countries it’s number 1. The solution to that depends again on the country your in, low density needs upzoning and high density needs expanding into parks or country side. In general housing tax to prevent bubbles is good and easy mortgage lending, which leads to higher housing prices in general, should be discussed.
How did he tackle the problems and solutions with respect to my article? First, he has another solution to the construction problem, though I think changing zoning laws and take into account nimby’s is another effective measure. Second he has the problem and solution as I did, speculation on housing. Lastly he mentioned easy mortgage lending, which I hadn’t heard before. So looking into that should be useful as well.