By Sam Bowman, John Myers, Ben Southwood | Works In Progress
Try listing every problem the Western world has at the moment. Along with Covid, you might include slow growth, climate change, poor health, financial instability, economic inequality, and falling fertility. These longer-term trends contribute to a sense of malaise that many of us feel about our societies. They may seem loosely related, but there is one big thing that makes them all worse. That thing is a shortage of housing: too few homes being built where people want to live. And if we fix those shortages, we will help to solve many of the other, seemingly unrelated problems that we face as well.
The obvious effects of expensive housing
Where you live affects nearly everything about your life – where you work, how you spend time off, who your friends and neighbours are, how many kids you can have and when, and even how often you get sick. Most people’s most valuable asset is, by far, their own home. And housing is so important for the overall economy because it determines the location and supply of the most important ‘resource’ of all: people.
There’s a growing consensus that housing is too expensive in most Western countries. In many places, the prices of new homes far exceed the cost of building more of them. Higher incomes in cities draw people to those places, who use some of their increased wages to bid up rents and house prices there. Easier credit and falling interest rates, which reflect a lower cost of borrowing and lower returns from other investments, have helped people bid up the price of housing as well. For most goods, including very expensive and durable goods like ships and airplanes, higher incomes and falling interest rates would cause supply to increase, instead of keeping the price permanently high. But for housing in and around many in-demand cities, supply has not been able to keep up with demand.
This is true across the developed world: Dublin, Singapore, Auckland, Paris, Vancouver, Rome, Hong Kong, Barcelona, Moscow, Cape Town, Zurich and many other cities have wildly expensive housing compared to the cost of building more of it. Costs are especially high in places whose economies are built on intangible capital, like software or financial services. In these kinds of industries, there are especially large benefits to people being near one another, because it makes them both more productive and more innovative. This is why the San Francisco Bay Area – probably the most productive place in the Western world – is also one of the most in-demand places to live. And that demand, plus restrictions on building more houses, is why it is one of the most expensive places to live as well.