So, WHY can’t you afford a home?

Occasionally you read something that challenges your firmly fixed views. Like most in housing, I fall easily into the simple analysis that there is a direct link between our inability to build new homes and the housing affordability crisis. If only we built more then everything in housing would gradually come right.

Josh Ryan-Collins’ new book ‘Why can’t you afford a home?’ definitely makes you think in a different way. The traditional analysis fails to explain why the crisis has emerged in so many different countries at the same time despite widely varying policies and approaches. He says this outcome is based on two pillars: the priority given to private home ownership as the dominant housing tenure and what he calls the ‘self-reinforcing feedback cycle’. On the first of these, most countries have promoted housing as an (unearned) source of wealth rather than just somewhere to live by reducing property and capital gains taxes on housing compared to other investments. On the second, Ryan-Collins asserts that it is no coincidence that the crisis has mushroomed since the deregulation of financial services. No amount of fiddling with the planning system or blaming migrants can moderate the huge global forces that have been at work.

The ‘self-reinforcing feedback cycle’ works like this:

‘In order to afford a home, most people need a mortgage. But when mortgage credit is extended to buy an existing property, it inflates house prices as bank lending involves the creation of new money. If house prices rise faster than incomes, the demand for mortgages increase, banks lend more, prices go up and so on’.

Strengthened by the perceived global public debt crisis, which constrained direct building of homes by the state, governments increasingly looked to the banking sector to find new ways of satisfying both housing demand and the clamour for individual home ownership. Thrifty banking was replaced by almost unlimited lending relative to incomes. Bank lending, previously focused on business investment, became concentrated on lending for residential purchase. Banks liked it because loans had collateral, and, unlike business, there was no limited liability. Worst of all, after an initial consumption effect (people buying houses tend also to buy furniture and white goods etc) residential lending did not lead to much growth – mainly adding to price inflation. People were effectively borrowing against rising values, so everyone gets a stake in keeping values rising. But the system becomes more unstable and volatile, inequity between those who manage to buy and those who don’t rises, and more people become priced out. Productive investment is frozen out in favour of speculative lending, and economies become more vulnerable to economic shocks.

Solutions therefore need to be much broader than those that governments and central banks have attempted to date. Crucially, Ryan-Collins argues, ‘land and credit markets need to be shaped to create public value: in this case affordable, decent quality housing.’ He notes that some successful modern economies have been rather less dependant on rising property prices, notably Germany, Japan, Korea and Singapore. Priority must be given to lending for productive investment by business, guiding credit away from property. Property taxes are needed to make it less attractive as a financial asset, including a land value tax, and we should learn from those countries where more land is publicly owned.

Curiously, after this long analytical journey, during which Ryan-Collins challenges my simple notion that the answer to unaffordability is that we must build more, he confirms my other long-held and deep-seated simple assertion when he says that one structural solution is “supporting alternative forms of tenure such as renting, social housing and cooperative home ownership where housing is viewed as a place to live, not a financial asset.”

This is a stimulating read and the book (which also benefits from not being as long as most economic tracts) delves into areas of economic and financial policy that deserve far more scrutiny. I would have liked a little more analysis of market changes in the UK since 2003 which have led to a decline in home ownership and the resurgence of private renting. However the book’s strength is that it goes beyond description and analysis to promote possible solutions. These are inevitably long-term and international but they could begin to influence government policies in the here and now.

Josh Ryan-Collins is a Senior Research Associate at the Institute for Innovation and Public Purpose, University College London. ‘Why can’t you afford a home?’ is published by Polity Books. If all else fails, it is available on Amazon.

In November Josh Ryan-Collins will be giving a talk about the book for UCL Institute for Innovation and Public Purpose (IIPP). Details here.