I would like to commend Professor David Miles for a fascinating talk on the causes of rising house prices, going beyond the usual suspects and looking at technology and incentives. Given the short lecture format not everything could be covered, so I would like to add some of my own thoughts from the point of view of economics and technology.
The decline in interest rates since the early 1980s, both nominal and real, have certainly had a significant effect on house prices. The decline was driven by disinflation and the resulting lower volatility in inflation, which allowed real rates to go much lower. A global savings glut and more recently, monetary stimulus are additional factors. While this is a well-known fact, it is nevertheless important in any discussion about house price growth.
These factors raised affordability at a fixed share of earnings. As much as economists like to look at everything in real terms, nobody in the 1970s could borrow against future inflation if monthly payments would be crushing at double digit interest rates. The longer duration made possible by lower rates would therefore unlock earnings decades in the future to borrow against, rather than being heavily front-loaded while interest rates were high.
Banks went along and raised their limits for maximum lending to earnings, with a significant lag, partly because it takes a long time for stress test interest rates to reduce as well. In other words, when banks ask the question of whether can you afford your repayments if interest rates rise to x%, the x is decreasing very slowly.
However, at the current zero lower bound, there is not much upside to house prices from this factor alone but plenty of potential downside.
What is often missing from the analysis of house price growth (without undertaking a literature review) is a breakdown of how people are actually financing house purchases far above the maximum bank multiples of 4x earnings. Detailing the sources of this further equity or debt would help to determine whether any of these are sustainable.
Increasing equity via repayment of previous homes certainly is sustainable, inheritance and parental gifts probably is too (unless taxed too heavily). On the other hand, rising home equity from appreciating prices may not be counted on as a source of increasing equity as people usually move to more expensive houses than they were coming from. As pointed out in the lecture, older people moving from expensive to cheap accommodation are becoming a rarer feature of the housing market.
Another route to raising affordability is raising the maximum multiples of mortgage to earnings and reducing minimum equity requirements. Having just been through a harrowing financial crisis this is unlikely to occur for at least a decade.
The lecture covered the topic of trading more space for other things. It appears that the appetite for more space is unbroken, doubling in the last few decades in the US, which are a truer expression of preferences than the artificially constrained picture in the UK. There is a possibility that ‘peak stuff’ may put an end to this trend. ‘Software eating the world’ has removed the need for many devices, disks and books in the home, the switch to LCD TVs hanging on walls from bulky tubes has reduced removed many TV stands. VR could one day even make these obsolete and with it the distance between screen and seating.
A trend towards eating out more or relying on ready-made foods is diminishing the role of the kitchen, which could shrink in decades to come. Or it could absorb the role of the dining room, which appears to be on its way out. Storage space for groceries could also shrink as people switch to more just-in-time delivery that’s getting cheaper all the time rather than having to store months of supply from buying Costco sized grocery lots. The sharing economy could reduce the need for much stuff further, e.g. power tools, lawnmowers and other rarely used items, where lower transaction costs make it much easier to hire the required tools or skills by the hour. Of course, people have been creative in filling up the space with other things, e.g. home gyms, games rooms and ever larger bathrooms with saunas, Jacuzzis etc., as I have discussed in this previous post.
One piece in the growth of demand is however certain: the sharing of space of unrelated people (or of people in unhappy marriages) or living with parents in their 20s and even 30s due to cost would end if space was cheap enough.
The example of very tall and slim skyscrapers in the lecture is only one of many new technologies, maybe not even the most significant. Prefabrication and 3D printing could have a profound impact on the time and cost of construction. In 2015 a 57 story building was put up in 19 days and there are now early prototypes of 3D house printers and automated brick layers. Building and outfitting have not really improved in their productivity for decades. Assembling modules off site or autonomously with robots/3D printers instead could lead to large cost decreases.
By reducing the cost of going up in height it may be possible to increase the incentive paid to landowners with existing structures to tip the balance in favor of the agreeing to higher plot ratios, as discussed in the lecture. Similarly, not all countries have basements by default in most houses, with cheaper digging technology (unlike other building tech this is currently not heavily researched) this most unobtrusive kind of extension of living space would be of great benefit.
Focusing on the UK at first I would like to reference a number of publications by Policy Exchange, starting with this article. It lays out very clearly that the lack of local incentives is one of the main reason behind the lack of suitable space to build on. Fixing this would unlock a great amount of land that could lead to better accommodation for a great many people while remaining affordable.
Giving locals a share in the upside from new residents rather than just the downside of more crowding is something a more federated system of government could deliver, see Switzerland as an example of this. In addition, the oligopolistic hold on the housing market and land banks enjoyed by the large developers could be broken by selling land to individuals who would build on it instantly, rather than holding out for higher margins later. Examples such as Austria where 80% of properties are self-built support this.
I’d like to point out in particular that the so-called green belt around London in fact includes a great deal of farmland within a few miles of fast train connections to the center. This is a colossal waste of resources. Parks and woodlands are greatly valued by local residents and in frequent use and should remain protected. Densification by converting people’s gardens into more houses is usually hated and not a way forward. And while brownfield development is always cited as the way out of this crisis there’s only so much of it and it’s not usually where people want to live.
Surveys consistently show that the most preferred accommodation is a (semi-)detached house with a garden, yet very little of this that’s affordable is being created. Farmland is of low value (in 2010 a reclassification led to a 200x gain), has no use to anyone other than the farmer and in fact is net negative for biodiversity and local health due to spraying of pesticides and fertilizer. Not even the views over the empty land are that attractive. The correct test for keeping land as protected greenbelt should be whether it is accessible and used by the public. Farmland within and just outside the M25 does not meet this test and should be opened for widespread development, especially where it is within short a short distance of fast trains.
Two international comparisons stand out as interesting. In Tokyo it is possible to buy detached houses of decent size within 20 minutes commuting distance of central business districts at $300-400k. This is partly due to excellent transport but also because plot sizes are very small and going up is done in a way that is fairly attractive and preserves privacy. Houses are often torn down after 30-40 years. This may result in slightly higher total cost of ownership but it also enables a much better matching of housing preferences to housing stock.
If cheaper technology enables going from 3 to 4 or 5 floors at similar costs this can be done on existing land as part of the normal replacement cycle, all without requiring additional land and new transport infrastructure. It should also be noted that there are much fewer limits on design of such houses, leading to a much greater variety than can be found in other countries’ monoculture. While it is second best to a house with a garden it maximizes floor space while minimizing commuting time, a trade-off many in the UK would be happy to make.
On the other end of the spectrum is Houston, a city that has not made any attempts to rein in sprawl or impose many zoning rules. The result is affordable housing with plenty of space for a great majority of people. It comes at the cost of longer commutes but as can be seen from the next section technology can be of great help here.
Transport and communications technology
If we are looking one hundred years into the future, it is a near certainty that we will be in an age of autonomous vehicles. This leads to two profound implications:
- Space currently devoted to parking where people live will shrink dramatically as car ownership moves to a shared model (see recent Economist cover story), creating more land for living, and
- The radius of where people may travel from increases greatly, because of greater speed and comfort.
In terms of parking, space would free up both in the city centers, around transport hubs and on driveways as a far smaller shared fleet is needed for the same level of mobility than in a model of individual ownership. In residential areas, garages and driveways could be rearranged for more living space or units. Parking structures could be replaced with new high rise apartment blocks.
Travel will take two distinct modes, either home to transport hub or home to final destination, based on the density of the city. The first case usually covers cities in Europe and Asia where the dense urban core already has good public transportation: here it still makes sense to rely on trains to bring people to the city center, however the trains bringing them there could be sped up to much higher express levels with far fewer stops if the trip from house to station could be made autonomous. At the transport hub no parking would be required and the time in the vehicle could be spent sleeping or working.
In sprawling cities, transport will be fully door-to-door. Autonomy there would lead to much better traffic coordination, smaller gaps between cars and shorter journey times. Speed limits could be raised significantly. All this will happen without wildcards like Hyperloop or Boring company tunnels, which could improve on this further.
With regard to travel radius, there are four distances to consider when people make choices about a location to live, in no particular order:
- commute for employment,
- children traveling to schools,
- local shopping and entertainment amenities,
- distance to community and relatives.
In the context of employment, the rise of remote working is an important factor. While early projections of the death of the office have not played out, a mixed model may be emerging whereby people only commute on some of the days or for shorter workdays, completing a significant amount of work at home. This could reduce aggregate time in transport, so a daily one way 45 minute commute could be replaced with a 3 day a week 75 minute commute, or the commute would be scheduled for off-peak hours to avoid traffic with the rest of the work being done at home.
Much local traffic is about sending children to schools. In many countries parents have a preference for them to be within walking distance. With autonomous vehicles this is a much lesser consideration, children could commute from home to even distant schools in autonomous vehicles without their parents’ involvement, opening up additional employment opportunities to them. This would enable either families or schools to spread out much further than currently possible.
Shopping is being automated at a very fast rate, including groceries. Autonomous delivery is another near certainty over long enough horizons (see my previous post here), cutting down on the number of mandatory trips. While not everyone will adopt such a lifestyle, a significant proportion of the population that’s not interested in shopping as an experience or much entertainment outside the home (e.g. eating out) is enough to reduce demand for living close to such amenities.
This leaves distance to community and relatives as a key consideration. Again, the generation growing up now is far more used to interacting on social media and less reliant on in-person interactions so the importance of location in this respect may decline too. Opposite considerations can come up here as well, whereby it may be as much about avoiding particular communities than it is about finding them.
With communication and transport technology solving most of the distance issues, the main remaining reason for a choice of location is related to status and some unspecified “feel”, whereby city dwellers like the noise, buzz and freedom of a large city whereas more rural residents prefer peace, quiet and fresh air.
The model of ever rising house prices rests on the assumption of growing populations, but in many countries there’s not much rural population left to move into cities, birth rates are below replacement level in many countries and immigration isn’t at the scale to offset this and may never be. Life extension technology is at its infancy but over one hundred years could achieve significant breakthroughs, leading to population increases from lower death rates. Absent that scenario, the megacities are the most likely centers of growth, taking population from smaller cities as life will focus more and more around these megacities. The impact on house prices in faraway places then hangs on the question whether truly distant commutes like the one mentioned in the lecture from Somerset to London become viable.
My conclusion regarding the question of 100 year house price growth is as uncertain as the lecture’s. It depends on how many of these threads play out. The finance industry won’t be a positive factor in raising long term prices, at least in the near term, but large scale inheritance could be. The necessity of living near work, school, family etc. will certainly reduce but this could be replaced by a much stronger preference for city living, continuing a very long trend. Centuries-old building technology is due for a much needed shake-up like all other technologies but greater density may clash with preferences. Whether demand for space will keep growing also depend on how space-shrinking technology offsets our natural desire for ever more of everything. Demographic trends 100 years into the future are also uncertain, central predictions are set for declines in most developed countries but immigration and life extension could also change these.
It is only due to human ingenuity that we have achieved incredible living standards, constantly managing to achieve more output with less input. It would be a shame if we couldn’t bend the cost curve for housing as we have for almost everything else in this world. We owe it to future generations.