When it comes to housing, we've been trained to think of it illogically. We cheer every uptick in home prices without ever thinking about the consequences. We think of home prices like we do stock prices, when we should think of housing prices like food prices - something we can't do without.
English economist David Boyle may have predicted this about England, but the same economic forces exist in America.
Rising property prices will kill off the middle classes within 30 years and create a vast ‘impoverished’ proletariat, a government adviser has warned.
It would leave Britain with a ‘tiny elite and a huge sprawling proletariat’ who have no chance of ‘clawing their way out of a hand-to-mouth existence’, he said.
He said the traditional middle classes would need three or four jobs just to be able to pay soaring rents.
Britain's housing bubble is further along than America's. Plus America's housing market is so much larger and diverse.
Nevertheless, the idea of ever rising home prices having extremely negative consequences is an idea without borders and needs to be examined further.
While a lot of attention has been given to wealth inequality recently, not much attention has been paid to how that manifests itself in housing (ironically, one of the largest factors of that wealth).
On one side of the coin, a
recent study has shown that almost half of all renters are paying more than 30% of their income in rent - double the percentage in 1960.
Lisa Sturtevant, vice president for research at the
National Housing Conference, explained it very simply: "A tighter mortgage market is making it increasingly difficult for middle class folks to get home loans, which is pushing a whole group of folks into the renter side, which increases demand on that side and pushes up rents."
This has caused what Housing and Urban Development Secretary
Shaun Donovan calls "the worst rental affordability crisis this country has ever known.”
That's a big part of it, but there is another factor just as important as mortgage rates - housing affordability.
More than half the homes currently on the market in seven major American metros are currently unaffordable for local residents, and one-third of homes for sale are unaffordable by historic standards.
There isn't a direct correlation between home prices and rents, but there is a strong correlation.
High home prices are making it impossible for the young generation to buy even starter homes. First-time homebuyers only account for 26% of home sales in January. The percentage in a normal market is around 40% according to the NAR.
This is translating into a low rate of household formation, which among other things, creates a drag on the overall economy.
On the other side of the coin, the high-end housing market is growing like
gang-busters.
More than four in 10 residential property sales in the first quarter this year were all-cash sales, the highest level since RealtyTrac began tracking all-cash purchases in the first quarter of 2011.
While the mortgage market languishes, about the only area that is growing is the
jumbo market.
These two factors can best be shown by the graph below.
Economic Rent
When you think about it, the concept of one of life's necessities going up in price being a bad thing should be obvious. No one cheers when food prices go up, except for the farmer. So no one should be cheering when the price of housing goes up except for the landlord.
The problem is that we all started thinking of ourselves as landlords. The housing bust should have shown us otherwise.
And speaking of landlords and the impoverished proletariat (as David Boyle puts it), I would like to familiarize you with a basic concept of economics called unearned income.
Unearned income refers to income received by virtue of owning property (known as property income), inheritance, pensions and payments received from public welfare.
Unearned income is a burden on the general economy. Unearned income is an extraction from the productive economy. Even classical economists hated unearned income.
"As soon as the land of any country has all become private property, the landlords, like all other men, love to reap where they never sowed, and demand a rent even for its natural produce."
— Adam Smith: The Wealth of Nations
Because landlords have localized monopolies, they are usually free to charge whatever the market will bear, while not contributing anything to the economy.
What's more, landlords are generally from the wealthier classes, and the more wealthy the more land they own.
Let me introduce you to a 19th Century American economist that has been mostly forgotten - Henry George.
One day, while inquiring about the price of land in an area, it suddenly occurred to George that there was a connection between advancing poverty and advancing wealth. The philosophy of Georgism is simple:
everyone owns what they create, but that everything found in nature, most importantly land, belongs equally to all humanity.
George considered it a great injustice that private profit was being earned from restricting access to natural resources while productive activity was burdened with heavy taxes.
There is a strong moral case against private land ownership: if you go back far enough you will find that it only became private because someone killed and/or stole it from someone.
Plus, the only reason why someone owns it today is because they got there before someone else. Mother nature created the land, not the owner of that land.
The Landlord's Game
Consider the game Monopoly. Everyone has played it.
You go around and around until one person has all the property and money. It's a simple enough game to understand.
Did you ever wonder who created the game? The game was created by
Elizabeth Magie. At the time it was called the
Landlord's Game.
Magie designed the game to be a "practical demonstration of the present system of land grabbing with all its usual outcomes and consequences"
Magie was an early Georgist.
Henry George wrote Progress and Poverty, which sold 3 million copies in the early 1880's.
George argued, "We must make land common property.
By taxing land values, society could recapture the value of its common inheritance, and eliminate the need for taxes on productive activity. George believed that this would provide disincentives toward land speculation, but would continue to incentivize development, as landlords would not suffer tax penalties for any industry or edifice constructed on their land.
The idea has found strong sympathizers in the environmentalist movement. This may sound radical and unworkable in today's world, but you would be wrong.
In Hong Kong, the most capitalist society in the world, all land is owned by the government, which gets 35% of its tax revenue from all rents. It is thus able to keep all other taxes low.
What's more, economist Joseph Stiglitz created the Henry George Theorem which is "characterizes a situation where Henry George's 'single tax' on land values, is not only efficient, it is also the only tax necessary to finance public expenditures."
At the very least our approach to private land ownership needs to be reconsidered.