Affordable Housing Is An Impossible Dream

Summary

The housing market is structured to maintain high prices and low supply, which impedes the realization of affordable housing.

Abstract

The article discusses the systemic challenges in achieving affordable housing due to misaligned incentives among policy makers, banks, investors, and homeowners. The current system benefits from housing shortages, which drive up prices and rents, enriching those with assets while making homeownership less accessible for others. The situation is exacerbated by government policies, such as in Canada, where government-backed insurance on riskier mortgages artificially inflates the housing market, creating a hidden liability on the government's balance sheet. This incentivizes all parties to maintain high home prices to avoid funding this potential liability, suggesting that without a significant shift in incentives, affordable housing may remain an unattainable goal.

Opinions

Policy makers lack incentive to increase housing supply due to the wealth concentration in real estate assets.
Lower home prices and rents would lead to a wealth transfer from the rich (asset owners) to the less affluent (non-asset owners), which is currently undesirable for those in power.
The banking system's reliance on mortgage underwriting ties its stability to high home prices, further discouraging increased housing supply.
Government interventions, like Canada's policy of offering lower interest rates on riskier mortgages, inflate the housing market and create significant hidden liabilities for taxpayers.
The collective interest in rising home prices is a global phenomenon, as homes are viewed as investment assets that provide income and collateral for debt.
A shift towards affordable housing is unlikely unless there is a major realignment of incentives for all stakeholders in the housing market.

Because the system is structured to benefit from higher home prices

Housing shortages and the associated price and rent appreciation will become a bigger and bigger problem in the years to come. But there’s very little incentive from policy makers to rectify this because of misaligned incentives.

That’s because more supply and affordability by definition mean lower home prices and rents. And since housing is a big portion of the wealth of both individuals and institutions, a widespread increase in affordability would be equivalent to a wealth transfer from those with assets (the rich) to those without.

And that’s not all — most countries’ banking systems are heavily linked to home prices thanks to all the mortgages they underwrite. So policy makers, banks, big investors, and home owners are all incentivized to keep supply scarce and prices high — thus, it’s not surprising at all that there’s a home affordability problem.

Kareem Kudus’ article about the housing affordability problems in Canada is an eye opening one. I didn’t realize that in Canada riskier mortgages (where the initial down payment is significantly below normal) actually enjoy a lower interest rate than safer mortgages (with higher down payments) because they are basically guaranteed by the government. In essence, the Canadian government is pumping money directly into the housing system. While it may not be buying mortgage bonds outright, it is using a sovereign guarantee of insurance to push mortgage yields down (which pushes bond yields down and artificially inflates bond prices). One scary implication of this is that there is a massive liability tucked away like a landmine in the Canadian government’s balance sheet.

If Canada’s government were forced to account for things like an actual insurance company, then it would need to offset that liability (its promise to backstop the mortgages that end up defaulting) with actual assets. But because it’s the government, it can wave its hands and say, “Don’t worry we’re good for the money.” Translation — if things get bad, either we will print the money or leave it to Canadian taxpayers.

This also means that there’s a heavy incentive for all involved to keep home prices high and rising — as long as the housing market is going up, then this potential liability need never be funded. That’s how it is in much of the world. Because homes are thought of as investment assets that produce income and more importantly collateralize debt, there’s a big incentive to keep supply low and prices high. Thus, unless incentives massively change, affordable housing is something we probably will never see.