Q2. What’s wrong with the housing market? How can we fix it?

By 2030, a stupefying estimated 3 billion people(approximately 40 percent of the world’s population) will
require access will require aid in accessing adequate housing. [1] The coronavirus pandemic has highlighted the
necessity for greater government intervention to relieve homebuyers of unaffordable housing caused by
increasing housing shortages and artificially high demand levels that create this overpriced market that requires a
correction. This essay argues that the housing crisis is driven by both supply and demand factors, and in order to
fix the market, governments need to address both issues simultaneously. Firstly, I will talk about the supply and
demand factors that led to the recent surge in house prices. Secondly, I will discuss how and why previous
policies aimed at fixing the housing crisis have failed. Thirdly, this essay will argue that a combination of supply
and demand policies are required to fix the crisis.

The coronavirus pandemic has substantially exacerbated demand and supply problems in the housing market.
Firstly, the pandemic has made a previously existing housing shortage worse by constraining construction. Due
to reduced availability of construction workers over the course of the pandemic lead to slowed housing
construction, as a result, inventory at the end of April 2022 stood 10.4% lower than April 2021.[2] This suggests
less new houses were being built and finished, further reducing the already low level of supply of new houses.
This coupled with record low interest rates adopted during the pandemic have worsened the housing crisis by
encouraging homebuying. For example, in the Unites States during 2020, mortgage rates dropped to 2.68% and
however between 1-3% in most major economies. [3] Even though low interest rates in theory provide relief for
those with low or no incomes by increasing affordability, in practice low interest rates kept demand high for
houses, making the demand problem worse and by accelerate the growth in house prices as seen below in chart 1.
Data from the International Monetary Fund shows that in most countries increase in the cost of housing has
substantially exceeded the increase in incomes with average costs of housing being more than three times the
average income in 90% of the cities around the globe assessed in a study. [4] As a result of all of these problems,
the coronavirus pandemic has kept prices high at the same time when many workers their livelihoods and
income, demonstrating how supply and demand problems made the housing crisis worse. The need to expedite
the implementation of such policies is thus critical.[5]

Historically the housing market has remained stable and rarely cultivates speculative behaviour compared to
other asset classes because of carrying costs that come with maintaining houses. However, large influxes of
institutional capital and investment in residential realestate has led to, recently housing markets have shown
increase volatility, reaching alarmingly high levels of house price-to-income ratios. Ratios similar to those
experienced during the 2008 Financial Crisis as substantiate in a OECD report (Fig. 4)–creating proliferating
“unaffordability bubbles”.

Though these price increases have not been due to excessive lending of subprime loans, institutional investors
have created artificially high demand in markets and are pricing out an increasing amount of homebuyers.[6] A
survey by the National Association of Home Builders (NAHB) states that in the first quarter of 2021, 45% of
active home buyers cited being outbid when they make an offer on a house.[7] In the third quarter of 2021, 18%
of single-family homes were bought by investment firms or companies—up 80.2% from the previous year—with
rising rents attracting more investors the residential real estate market is an increasingly attractive asset to have in
investors portfolios which additionally act as a high-yielding hedge against inflation and have non-cyclical
characteristics(can perform well even when the market in down for most assets).[8] In a annual Emerging Trends
in Real Estate® Europe report, only one residential real estate sector ranked in the top 10 sectors in 2009, but by
2018 five residential real estate sector ranked in the same list (Fig. 1.6). This growing inflow of institutional
capital into residential real-estate, dampens consumer purchasing power as they increase demand and thus
increase prices and have a higher ability to immediately purchase properties on the market. Making it harder for
homebuyers to find, bargain or buy houses on the market in a market with an increasing housing supply deficit.

Fig. 1.6:
The institution of a myriad of restrictive policies on housing like restrictive land-use controls, environmental and
other regulations are prohibitive in increasing the supply of housing as they reduce the incentive to building
housing or make it difficult to do so.[9] These regulatory barriers and land use policies that increase the gap
between the cost of building houses and their selling price thus removing regulatory barriers and other
bureaucratic roadblocks would allow the building of more homes and apartment and reduce costs incurred and
the time taken to build them.[10] Policies like single-family zoning and a myriad of land use policies restrict the
density of housing in many neighbourhoods and increase average costs of house extensively compared to prices
that could have be achieved otherwise. Thus, up zoning and rezoning places that accommodate only one single-
family houses to allow higher density, duplexes and triplexes, coupled with land prices would create more
efficient large-scale construction of larger neighbourhoods leading to higher supplies of housing at lower average
costs.[11] Reducing such disincentives to building housing would engender more large-scale building of houses
and reduce supply chain inefficiencies which are strong determinants of housing price increases or decreases.

Without government intervention and the appropriate implementation of policies by policy makers, supply chain
issues are likely not to resolve themselves, risk further increasing prices.
and engendering the creation of a larger housing bubble that is likely to have negative consequences on the
economy. A few policies in the past like the imposition of price caps on housing, rent controls, the taxation on
excess profits and prohibition of reselling newly built apartments have led to larger supply shortages by
disincentivizing the construction of homes and marring growth.[12] Rent controls lead to largely positive effects
in the short-run. When rent controls were introduced in California in 1994, in the long-run they lead to a 15%
decrease in accommodation provided as homeowners tried to rid their properties of these rent constrictions and
this later lead to an increase in general rents in the area as well as gentrification.[13] A mortgage guarantee
scheme in the UK that aimed to turn “generation rent into generation buy”. However, this scheme does little to
solve the real housing crisis– the lack of supply. This would increase affordability in the short run, but it in long
it would lead to a further increase in prices. [14] Thus, policies need to be incisively taken to counteract the side
effects of the policies which can only happen if both, demand and supply, factors are taken care of.

The only long-term sustainable solution is to significantly increase the supply of housing, however other policies
have to be taken simultaneously to prevent further increases in unavoidability of housing. One of the most
common effective policy tools employed are the tightening of mortgage financing and property taxes that are
levied on homebuyers. Though in the short run this policy would substantially decrease the home buying ability
of homebuyers, it would substantially decrease spending and this would help stabilise surging prices and increase
affordability in the long run. Higher property taxes targeted to be levied on investing firms and rich homeowners
who own residential property besides their primary residential property (houses used as rental properties) would
reduce increase costs of buying rental properties by high-income earners. This would thus, disincentivize buying
houses to rent out and leave a larger supply of housing in the market for other to buy. This decrease in demand
would help in curbing home prices.[15] However, monetary policies only play a short-term effect if not
employed alongside supply side policies which would do better to prevent the continuation of increasing prices.

Supply-side policies like regulation changes, collaboration of the private and public sector, immigration policies,
and reduction of land-use regulation would stimulate the required increase in supply to aid demand side policies
to take effect.[16] Streamlining regulation through public and private sector collaborations, especially in major
cities perfused with unaffordability, would allow for the sharing of risk for the private sector and incentivise
more diversification in terms of the types of housing built to cater to different family sizes in accordance with
citizens’ requirements who often cannot find suitable or affordable homes in today’s seller’s market.[17] This
could further encourage more efficient use of unutilised land outside specifically urban core areas to stimulate
more development as cities become increasingly denser and overpopulated due to more job opportunities.
Infrastructural changes in the economy to allow for cheaper transportation across larger distances would increase
the geographical mobility of citizens and engender higher productivity.
In accordance with more geographical mobility, more lenient immigration policies would reduce housing costs
by mitigating labour shortages through increasing the supply of construction workers as immigrants (immigrants
making up over 30% of workers in construction trades).[18] It could be argued that immigrants could potentially
displace native workers from skilled jobs, however finding suggest that 15% of workers in low-skilled
occupations are immigrants and only about 7% of workers employed in the top one-third most-skilled
occupations are immigrants and that immigrants are 60% more likely to be employed in low-skilled
occupations.[19] The inflow of immigrants is likely to lead to an increase in economic growth and a substantial
increase in housing supply.

Demand and supply policies are both pertinent in order to create greater downward pressure on housing prices,
especially in areas with comparatively high levels of speculative investing. In the paper “Curbing the Rising
House Prices: The Effect of Demand and Supply Policies on House Prices from a Perspective of the Timing of
Policy Implementation” by Hoonhee Park, he substantiates why policies to curb house prices would only be
effective if both demand and supply side policies are both employed and that employing only one of the types
would let house prices increase even further. Demand restrictions have more immediate effects and would
consequently upon announcement initially bring about a shock in the market that would slowdown price
increases, however if there is little to no supply, opportunity for home ownership would remain limited and after
a few weeks lead to a continued increase in house prices near the same rate as before. In contrast, when the same
demand policies are employed under moderately high levels of supply of homes, demand restriction bring about
a profusely more likely to curb housing prices downwards. Thus, demand restrictions without aid for supply side
policies elicit stabilising effects on house prices and not any significant downward pressure as substantiated in
Figures 3.1 and 3.2.[20]
 A regression model in the paper provides empirical evidence delineates that the announcement of demand side
policies under a moderate level of new home supply is associate with an average of 0.44% drop in the house
price index, whereas under moderately high levels of supply it was associated with a 0.88% drop in the house
pricing index. In addition, the employment of these policies in more speculative areas lead to larger changes and
side effects in the market. Applying only one policy in areas with higher levels of speculation (which constitute
higher levels of volatility) has a higher chance of prompting higher price increases in comparison to these being
employing in areas with low speculation. Hence, in especially speculative markets it becomes critical for the
government to appropriately employ both forms of policies with higher levels of caution.[21]

With the cumulative effect of the multifaceted approach that employs both demand and supply side policies that
reduce excess speculative investments in housing and increase the level of new housing supply, this housing
crisis cannot be addressed appropriately. As this essay delineates, both forms of policies must be employed
simultaneous to mitigate the side-effects of the other to achieve the stabilization or curbing of house prices.
Although the housing market seems unfettered by external conditions and recessions and continues to grow
overpriced, diligent efforts by the government to increase housing supply through incentives and the appropriate
employment of policies can help correct the market.

Footnotes:
1. “Housing | UN-Habitat,” unhabitat.org, n.d., https://unhabitat.org/topic/housing.
2. Diana Olick, “Existing Home Sales Fell in April to the Lowest Level since the Start of the Pandemic,” CNBC,
May 19, 2022, https://www.cnbc.com/2022/05/19/existing-home-sales-fell-in-april-to-lowest-level-since-start-
of-pandemic.html.
3. Kevin Graham, “Historical Mortgage Rates: 1971 – 2021,” Error! Hyperlink reference not valid., June 23,
2022, https://www.rocketmortgage.com/learn/historical-mortgage-rates-30-year-
fixed#:~:text=The%20lowest%20historical%20mortgage%20rates.
4. What Has Caused the Global Housing Crisis - and How Can We Fix It?,” World Economic Forum, June 16,
2022, https://www.weforum.org/agenda/2022/06/how-to-fix-global-housing-crisis/.
5. John V. Duca and Anthony Murphy, “Why House Prices Surged as the COVID-19 Pandemic Took Hold,”
Error! Hyperlink reference not valid., December 28, 2021,
https://www.dallasfed.org/research/economics/2021/1228.aspx#:~:text=Why%20House%20Prices%20Surged
%20as%20the%20COVID%2D19%20Pandemic%20Took%20Hold.
6. Amundi, “Global Real Estate Markets: Rich Valuations, but Not a Source of Systemic Risk,” Amundi
Research center, May 3, 2022, https://research-center.amundi.com/article/global-real-estate-markets-rich-
valuations-not-source-systemic-risk.
7. FactSet Research Systems Inc, “The U.S. Housing Market: High Demand, Low Supply, Rising Prices,”
insight.factset.com, May 27, 2021, https://insight.factset.com/the-u.s.-housing-market-high-demand-low-
supply-rising-prices.
8. Hudson Cashdan, “Modeling an Asset Class: Why Wall Street May Be in the Single-Family Rental Market for
Keeps,” Toptal Finance Blog, accessed June 30, 2022, https://www.toptal.com/finance/real-estate/wall-street-
buying-single-family-homes.
9. Pamela M. Blumenthal, John R. McGinty, and Rolf Pendall, “Strategies for Increasing Housing Supply in
High-Cost Cities,” August 2016.
10. Ibid.
11. Ibid.
12. Ibid. P.15.
13. “Why Rent Controls Won’t Solve the Urban Housing Crisis,” World Economic Forum, May 14, 2021,
https://www.weforum.org/agenda/2021/05/why-rent-controls-won-t-solve-the-urban-housing-crisis/.
14. Stuart Trow, “Helping People Buy Homes Won’t Fix the U.K.’S Housing Crisis,” Bloomberg.com, March 29,
2021, https://www.bloomberg.com/opinion/articles/2021-03-29/sunak-s-plan-to-guarantee-mortgages-won-t-
fix-the-u-k-s-housing-crisis.
15. Abby Ivory and Kent W. Colton, “Innovative Solutions for the Housing Crisis (SSIR),” ssir.org, December 1,
2020, https://ssir.org/articles/entry/innovative_solutions_for_the_housing_crisis#.
16. Lisette van Doorn, Amanprit Arnold, and Elizabeth Rapoport, “In the Age of Cities: The Impact of
Urbanisation on House Prices and Affordability,” Hot Property, 2019, 3–13, https://doi.org/10.1007/978-3-
030-11674-3_1
17. Ibid.
 18. Natalia Siniavskaia, “Immigrant Workers in the Construction Labor Force,” March 3, 2020.
19. Steven A. Camarota, “The Wages of Immigration,” CIS.org, January 1, 1998, https://cis.org/Report/Wages-
Immigration.
20. Ibid. p.16.
21. Ibid. p.46.

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