> Housing is the main driver of inequality and there is little change happening.
Have hope. Things are changing as I see it.
Fundamentally, I believe that we have seen a multi-decade boom because property prices are closely linked with interest rates. People borrow according to their capacity to service the loan. For most home buyers affordability is measured by monthly repayments, not the ticket price.
As prices rose, capital gains became a more significant consideration. This meant that some people who would not have purchased investment properties did so. They would not have done this if they were only looking at the income earning potential of the asset. Rental yields have been getting much worse over time. People stopped investing for yield and started to speculate - doing well with favourable tax regulations and the leverage opportunities that mortgages provide.
In the past, if you owned a second home (holiday home, convenient apartment in the city, etc) it would cost you money if its value didn't appreciate at a quick enough rate. For decades now that hasn't been the case - property prices have been appreciating so quickly that owning a property has been a good financial bet even if it hasn't been earning any income. It was no longer the preserve of those wealthy enough to maintain more than one property just for the lifestyle it allows. Naturally this means that the number of people that have been doing this has increased considerably.
There is no doubt in my mind that the proportion of underutilised properties has increased in correlation with the rise in property values and the steady decline in interest rates. For many, this is hard to accept as it doesn't fit with the naive assumption that prices have been rising because there is somehow more demand for homes. What they forget to factor in is that there is a difference between demand for homes and demand for investment opportunities. To put it another way, a speculative boom creates artificial demand.
A few points to back this up:
- In the UK, the proportion of underutilised properties is highest in areas with a higher average property value.
- In Melbourne, Australia, it has been shown (through examining water usage) that the proportion of empty properties is highest in areas that have experienced the highest capital gains.
- In NZ, the ratio of households to dwellings has decreased since the mid-90s (the start of NZ's boom).
All of this suggests that the rise in prices is not due to a shortage of dwellings for people to live in. It is a shortage of available dwellings.
The wheels came flying off NZ's property market at the start of 2022. This was caused by rising interest rates. Where I live, this resulted in a flood of properties getting listed for sale and an increase in available rentals at lower rents. Where did those extra rentals come from?
Another factor in all of this is the rise in short term rentals (AirBnB, etc). AirBnB effectively allows property investors to take properties out of the housing stock and still collect rent. Many cities around the world (especially major European tourist destinations) suffer from this. Ideally it would be regulated much more tightly in future, but I think there is a small chance that that may not be necessary. Prices are now so high in many places, and servicing loans so costly, that even the higher rents that can be achieved in this market may not be enough to make yields worthwhile. A lot of these properties may make their way back to the regular housing stock as investors are forced to sell up.
So, the big question in all of this is, we know what happens when interest rates drop and property prices appreciate - what happens when interest rates rise and capital gains are off the table (or negative gains become the norm)?
Have hope. Things are changing as I see it.
Fundamentally, I believe that we have seen a multi-decade boom because property prices are closely linked with interest rates. People borrow according to their capacity to service the loan. For most home buyers affordability is measured by monthly repayments, not the ticket price.
As prices rose, capital gains became a more significant consideration. This meant that some people who would not have purchased investment properties did so. They would not have done this if they were only looking at the income earning potential of the asset. Rental yields have been getting much worse over time. People stopped investing for yield and started to speculate - doing well with favourable tax regulations and the leverage opportunities that mortgages provide.
In the past, if you owned a second home (holiday home, convenient apartment in the city, etc) it would cost you money if its value didn't appreciate at a quick enough rate. For decades now that hasn't been the case - property prices have been appreciating so quickly that owning a property has been a good financial bet even if it hasn't been earning any income. It was no longer the preserve of those wealthy enough to maintain more than one property just for the lifestyle it allows. Naturally this means that the number of people that have been doing this has increased considerably.
There is no doubt in my mind that the proportion of underutilised properties has increased in correlation with the rise in property values and the steady decline in interest rates. For many, this is hard to accept as it doesn't fit with the naive assumption that prices have been rising because there is somehow more demand for homes. What they forget to factor in is that there is a difference between demand for homes and demand for investment opportunities. To put it another way, a speculative boom creates artificial demand.
A few points to back this up:
- In the UK, the proportion of underutilised properties is highest in areas with a higher average property value.
- In Melbourne, Australia, it has been shown (through examining water usage) that the proportion of empty properties is highest in areas that have experienced the highest capital gains.
- In NZ, the ratio of households to dwellings has decreased since the mid-90s (the start of NZ's boom).
All of this suggests that the rise in prices is not due to a shortage of dwellings for people to live in. It is a shortage of available dwellings.
The wheels came flying off NZ's property market at the start of 2022. This was caused by rising interest rates. Where I live, this resulted in a flood of properties getting listed for sale and an increase in available rentals at lower rents. Where did those extra rentals come from?
Another factor in all of this is the rise in short term rentals (AirBnB, etc). AirBnB effectively allows property investors to take properties out of the housing stock and still collect rent. Many cities around the world (especially major European tourist destinations) suffer from this. Ideally it would be regulated much more tightly in future, but I think there is a small chance that that may not be necessary. Prices are now so high in many places, and servicing loans so costly, that even the higher rents that can be achieved in this market may not be enough to make yields worthwhile. A lot of these properties may make their way back to the regular housing stock as investors are forced to sell up.
So, the big question in all of this is, we know what happens when interest rates drop and property prices appreciate - what happens when interest rates rise and capital gains are off the table (or negative gains become the norm)?