A House is Not a Widget

Most people know instinctively how important housing is. Anyone who has been homeless knows that lack of a secure home destroys the chance of leading a decent life –  getting and keeping a job, building lasting social and familial relationships, staying healthy, making a contribution to the broader community. Most Australians also believe, or act as if they believe, that the overwhelming bulk of their fellows can and will be provided decent housing through the magic of markets. Just like a factory turning out widgets, ‘the housing system’ will provide enough houses of the right type in the right locations to oil a smoothly working urban economy. If only this was true. In fact, housing provides vivid, indeed devastating examples of multiple market failure, the most extreme consequence being chronic homelessness, the end of a production line of socially and economically adverse effects that impact unequally across society.

Housing policy in capitalist countries like Australia has been impoverished by a slavish reliance – bordering on religious – to a simplistic market model in which housing is treated as an homogenous product dancing to the tune of supply and demand on the head of a pin, as it were. If demand increases, prices will rise causing supply to increase until a situation is reached in which the number of houses exactly equals the number of residents with the resources to move in. What could be simpler? Let the market work it all out.

In fact, this undergraduate picture is only held at the level of rhetoric, a catechism solemnly and respectfully rolled out, from time to time, by conservative politicians and the property lobby. Anyone else who has anything to do with real housing markets knows that such stylized responses are way wide of the mark. Housing provision entails a complex interaction of many actors – existing owners, buyers, renters, investors, lenders, builders, land developers, exchange professionals, public officials – all operating in particular institutional contexts and an historically evolved urban land use matrix. Multiple housing submarkets loosely crosscut, distinguished by stock tenure, age, size, quality, location and resident income and identity. Above all, time is the critical factor in understanding how the housing system really works and fails.

Housing takes a long time to produce. Land must be procured and developed to a point where builders – building to order, speculatively or for themselves – can erect the new structures. Agents must market the resulting stock. Prospective buyers must search for and then raise sufficient finance to buy the stock. Once occupied, housing gives off its various ‘utilities’ – shelter, access to services, status and return on investment – over decades, even centuries. As the value of the underlying land increase faster than the value of the house, which progressively depreciates, redevelopment occurs, changing the physical and social characteristics of the property and the character of its neighbourhood.

Differential access to ownership reflects the very unequal distributions of income and wealth in countries like Australia. Because housing represents about half of all personal wealth, it focuses the mind wonderfully. Getting into home ownership takes immense efforts to save an initial equity investment for which – as a conservative politician once helpfully pointed out –  it requires one to get a well-paying and secure job. Alternatively, family wealth can be mobilized to move younger members to the promised land. Once into home ownership, the benefits are many and long term. As the rents paid by those who can’t make the leap continue to rise with general economic and population growth, the real costs of owning one’s home declines. Like the television ad for Industry superannuation funds, the smiling shopper rides the up-escalator while her glum companion is glued to the down-escalator. In spite of decades of government schemes to ‘assist’ first home buyers, access to home ownership remains stubbornly unequal. Working and middle class buyers are continually outbid by those from wealthier backgrounds and rental investors seeking to reduce their tax liabilities and park their wealth in safe assets. Leveraged investors, in particular, reap high returns on equity, effectively subsidized by the rents their tenants pay and the taxes other citizens bear. The cumulative benefits flowing to home owners over a lifetime reinforce the initial inequalities of fortune that enabled their original access to the tenure. Owners accumulate wealth through capturing urban land rents, effectively privatising the collectively created values of urban growth.

It has not always been thus. During the decades after World War II home ownership rates rose sharply in Australia and the United States, as cities suburbanized on a grand scale. With secure employment and wages rising steadily, commercial and government owned banks prudently increased lending to male-headed working families. Small public rental housing schemes were tweaked to aid the process. Admittedly, women, recent migrants and Indigenous peoples were generally ignored – by the banks and the politicians – but home ownership rates had, by the early 1970s, peaked at more than two-thirds of households. This heralded a modest though temporary reduction in inequality. A similar outcome emerged in Britain fifteen years later, partly as a result of a deliberate policy of selling off the best stock in the large council housing sector. Thereafter rates fell or stagnated as a banking system let off the leash turned residential real estate into a portfolio of financial assets, with disastrous consequences for the general health of the economy and the prospects of the bulk of the population. What was good for the top 1% was not good for the rest, after all. Trickle down ran in reverse.

The revolution In mortgage finance set off by the progressive deregulation of financial markets in the Western economies from the late 1970s onward, led to a massive and pronounced housing boom in the first decade of the Twenty-first century. This culminated in a devastating financial crisis of global scope in 2008 that threatened to drag the leading economies into a 1930s-style great depression. Many interacting factors coalesced to bring about the barely averted catastrophe – but housing lay at its centre. From a sleepy protected backwater of the financial sector, housing mortgages and their complex derivatives threatened to – in the words of the then American President – see ‘this sucker go down’. It very quickly became clear that in developed unstable capitalist societies, there was a strong macro-housing nexus, forged by the overblown and uncontrolled nature of the financial system.

Housing markets, it turned out, formed a transmission belt propagating waves of both economic exuberance and desperation. Housing figures as the critical linchpin in a positive feedback loop at the economy-wide level. When housing demand is high, prices rise creating an immediate climate of optimism and widespread belief – assiduously reinforced by real estate operators – in the prospect of future, indeed endless, rises. A buoyant market encourages mortgage lenders to lend, as the risk-reward calculation breaks in their favour. The flow of finance underpins continuing rises in housing demand and prices, only partly dampened by the decision of existing house owners to put their dwellings on the market; an increasing supply of new houses takes time to catch up and makes little short term impact, other than to provide yet another outlet for lenders.

Beyond and reinforcing this primary dynamic, owners, both owner occupiers and investors, feel and are wealthier, providing a jolt to their personal consumption and investment activities. The rising value of their housing wealth provides the enhanced collateral basis on which to fund these activities. ‘Equity withdrawal’ funds both increased consumption and investment throughout the growing economy, pushing unemployment down and – according to conventional economic theory – wages up. In fact, the new century saw systemic changes in the primary distribution of incomes with most of the benefits concentrated at the top. This had the effect – even without the influx of foreign property investors – of accentuating the differentials in housing prices between and within regions. Growth in the construction and household goods industries boomed, feeding back into the general climate of optimism and frenetic activity. Nothing succeeds like excess.

BUT what goes up can and inevitably does come down. How far the ‘correction’ unwinds depends on many factors, including how governments and central banks react. At some point, however, fear of missing out on the rising housing market turns into fear of losing everything. Whatever the spark, a reverse dynamic is set into motion. The virtuous upward spiral of increasing demand, rising prices, increasing lending and economic growth, turns into a viscous cycle of decline. Housing prices slow, stabilise and in some places start to decline. The owners’ collateral value peaks and declines. Lenders reassess and tighten lending criteria. The economy slows. Unemployment edges up. Housing price declines spread, further feeding the process.  Everyone begins to feel edgy. In spite of spirited efforts of the real estate lobby and politicians to reassure one and all, reality bursts through in the form of declining sales rates and a pervasive feeling of doom.

However, the amplitude of housing price cycles has, historically, been less than other economic cycles, in particular stock market gyrations. This follows from the material fact that people can’t live under share scrip and the aforementioned relevance of time to the operation of housing markets. The first point is obvious. An outright home owner can just sit pat and meet the minimal outgoings. Owners on a mortgage can stay as long as they keep up the repayments. A rental investor can do likewise, since the tenant effectively pays the lender. But this process signifies more than a move in along the existing short term supply curve of microeconomics. It results from a shift inward of the whole curve. Existing and prospective house sellers reassess the likelihood of future increases in prices relative to declining current prices and speculate by holding their dwellings off the market. Time is on their side. Contrast this with the owner of traded shares. Time is definitely the enemy here. Once the market turns down, fear replaces greed. Investors rush to get out. Canny ones already have. From 2006, insiders began to sell down their positions and even hedge against it. Large operators like Goldman Sachs actively bet against their clients. The Big Short made fortunes for contrarian investors when the crunch came. Once it becomes clear that the market has turned, the sense that it’s too late, turns fear into panic. Automated trading algorithms accentuate the panic. It takes some time before bargain hunters enter to slow the rout.

Of course, certain other strategic sectors of the economy interact with financial operators with macroeconomic effects. Thus, shocks to major exports and large domestic industries can set off an escalating downward spiral in the economy at large, as can unforeseen international events like wars and oil price hikes. However, housing by its nature and sheer scale as a primary locus of the nation’s accumulated wealth, punches above its weight. This is why policy makers ignore this sector at our peril. Even ignoring the wider economic arguments linking decent housing to rising productivity and questions of social justice, governments need to make housing a central object of their concern, if only to avoid being blindsided again by a 2008-scale debacle.

Postscript: Housing as a metaphor

A metaphor can sometimes be useful in teasing out complexities in a situation, especially when locked within an unhelpful paradigm.

In his book Social Justice and the City, David Harvey illustrates key elements of the spatio-temporal dynamic of urban differentiation through the operation of housing (sub)market(s) by way of an analogy. Think of the operation of urban housing markets akin to the progressive filling up of a theatre or cinema. Here Harvey (1973, p. 168) introduces a concept of ‘absolute space’. “In capitalist society this characteristic of absolute space is institutionalized through the private property relations so that ‘owners’ possess monopoly privileges over ‘pieces’ of space.” He continues:

We can begin to incorporate considerations stemming from the conception of absolute space if we envision allocation occurring across an urban space divided into a large but finite number of land parcels. Land-use theory then appears as a sequential space-packing problem (with the possibility of adding space at the periphery) [and one must add, vertically]. In the housing market with a fixed housing stock the process is analogous to filling up seats in an empty theatre. The first who enters has n choices, the second has n-1, and so on, with the last having no choice. If those who enter do so in order of their bidding power then those with money have more choices, while the poorest take up whatever is left after everyone else has exercised choice (Harvey, 1973, p. 168).

We can tease this analogy out a little to get a better idea of how it casts light on the operation of real urban housing outcomes.

·      Participating in the metropolitan housing market is like trying to get a seat inside the theatre.  People line up in order on the footpath according to the amount of money they have in their pockets.   People file in paying at the door until the “house full” sign goes up.  Those still outside miss out.

·      In rapidly growing communities the number of people queuing increases faster than the number of additional seats being added inside, so more and more people miss out.  Ticket prices rise locking more people out. 

·      People with more money pay for bigger and more luxurious seats, so attention shifts from the downstairs stalls upstairs to expanding the lounge and dress circle.

·      Rich people buy seats for their children.

·      In communities becoming more and more unequal, the queue outside lengthens as cheap seats in the stalls are ripped out and replaced with more luxurious upholstery.  New arrivals in town with money push into the queue half way up, while poor immigrants are politely told: “the queue starts at the back”.

·      Those at the back of the queue are too far from the entry door to know how far from the door they are.

·      Some near the back of the queue sneak in the back door of the theatre and stand up at the back out of sight.  Others club together to buy a ticket and share by sitting on one another’s lap. Many give up any hope of getting in to the show.

·      An attempt is made to extend the market by offering more viewing sessions.  But the wealthy choose to see more films.

·      More cinemas are built further out in poorer areas but the wealthy have cars, the poor still can’t afford the ticket prices and the planners take forever to approve construction and grant occupancy certificates.  

And so on….

This metaphor refers to a number of phenomena like: housing market segmentation, housing supply shortages and lags, socio-spatial inequality, inter-generational inequality, gentrification, overcrowding, peripheral marginalization, homelessness (hidden and overt), information asymmetries and other forms of market failure. It is a useful tool for focusing on why the poorest groups miss out and are most likely to have their situation worsen through time. “In a sequential allocation of a fixed housing stock in order of competitive biding, the poorest group, because it enters the housing market last, has to face producers of housing who are in a quasi-monopolistic position…. Lack of choice makes the poor more prone to being squeezed by quasi-monopolistic policies (a process not confined to the housing market but which extends to job and retail opportunities, and so on)” (ibid. p. 170). And as the summary points above make clear, the power of those quasi-monopolistic forces are reinforced by the tendency of urban population growth and the increasing relative purchasing power of the richest groups to jump ahead in the queue, pushing less affluent patrons back towards a disappearing end, while also bending the architecture of the built form and the content of the program to suit the demands of the affluent existing and newcomer households.

In short, housing markets are highly differentiated in space and time and don’t work like the textbook says.  This makes policy tough.  It’s clear that left alone housing supply is unlikely to be adequate – in quantity, quality, price or location – across the community.  And it is unclear how policy makers can fix things.

In a very real sense the operation of urban housing and job markets go on behind the backs of the people who live and work in the city. Although the processes and many outcomes can be grasped at the micro level of individual households and other urban actors, the full effects can only be appreciated at the macro level by accounting for the unintended emergence of system wide impacts that follow from the overall ‘logic of the situation’.