Growing Affordable Housing World Crisis
According to the Wall Street Journal, the larger cities around the world, from New York to London, and Stockholm to Sydney, are making efforts to work out the growing affordable housing crisis. The data provided by Knight Frank illustrates that in the past 5 years, house prices in 32 major global cities have increased by an average of 24% over the same period, but the average income has only increased by 8%. Economists consider it shocking that affordability still decreased even during the period when the global economy was booming. The reason is that income growth has been unable to keep up with the rapid rise in house prices. Migration is part of the cause of this crisis. Cities have flourished in the past decade. Driven by job opportunities and high incomes, people are migrating from distant suburbs and towns to big cities. Some countries focus on promoting unfettered free-market solutions, while others make greater use of measures such as rent control and government subsidies. But there is a limited solution to resolve the housing crisis, and most measures will have other negative ripple effects. This paper is going to examine the impact of the housing and affordability crisis on urban economics and the importance of effective measurement on this issue.
In the report published by Knight Frank dealing with global affordability, several factors that are able to influence housing affordability around the world include rapid urbanization, commoditization of housing, politics, and supply. The three key measures in its Global Affordability Monitor are house price to income ratio, rent as a proportion of income, and real house price growth compared to real income growth. Bailey comments that in the past five years, 18 of the 25 largest cities in the world have seen inflation-adjusted increases in housing prices outpacing the increase in household income. In the other two places, Dubai and São Paulo, the same problem is also faced by the decline in income more than the decline in house prices. Increasing demand for investment in real estate has also driven housing prices soaring, including those married couples in the country who will buy a second home, as well as those foreign investors who are trying to take advantage of new technologies and increasingly global finance system. On the other hand, the government was unable to provide sufficient funds to subsidize affordable housing because the aging population crisis leads to the increasing costs on pensions and healthcare, and most governments have tight budgets. The private sector is also unable to resolve the economic housing crisis. In many hard-hit cities, developers have built hundreds of thousands of homes, but most of them are priced for high-end buyers and tenants, not the middle class and working class who are squeezed out of the market by high prices.
Tokyo is one of the few cities where the supply of affordable housing keeps up with demand, which has prevented the crisis of affordable housing. In an article in Financial Times, Harding suggests that “Tokyo does a better job of allowing housing supply to keep up with housing demand. In 2014, Tokyo issued permits for 142,417 new housing units. Japan sets housing regulations at the national level. As a result, if a Tokyo landowner wants to knock down his single-family home and replace it with a six-unit condo building, there’s little that his neighbors can do to stop it. That can be annoying to individual homeowners, of course. But it also has the huge upside of keeping housing costs under control”. However, the opponents argue that Japan’s regulation not only goes against the increasing house price but also against the pattern of city development.
In order to control house prices, governments in some countries, including Canada and Australia, have increased taxes designed to curb home purchases by investors or foreigners. For most of the past decade, Chinese investors have been particularly active in buying property in Canada’s larger cities like Toronto and Vancouver, which drives up house prices. Especially, Vancouver become a famous city in North America because of having the least affordable housing relative to household income. They point out the ripple effect across metropolitan sub-markets, first of all, “houses price impulses are transmitted iteratively through a metropolitan market because of displaced demand”, that is buyers undeterred by price inflation in their ideal district so that they relocate to more affordable places. Secondly, the displaced demand stimulates a second migration from the central area of the city to the suburbs. Thirdly, it is said that “a third behavioral mechanism in addition to displaced and replaced demand in shaping a ripple effect is the power of expectation among sellers. Knowledge of price increases in urban hot spots raises expectations of similar premiums by sellers elsewhere, particularly if their property is located closer to inflating sub-markets”.
In terms of the impact of constant growing housing prices, it would eventually turn into an economic bubble. Krugman claims that two main characteristics of the economic bubble are firstly serious imbalance between supply and demand of commodities, supply is much larger than demand; and secondly, the speculative trading atmosphere is very strong. The real estate bubble is a kind of situation where real estate prices are seriously deviated from the value of use due to real estate speculation, and market prices are out of the support of actual users.
The affordability housing crisis is a global issue. Every city is different when it comes to the solutions to this crisis. It is essential to build adequate, safe, and affordable housing in and around the city. The promotion of social equity, economic development, and environmental sustainability are to great extent dependent on housing.
