Saturday, April 28, 2012

A global crisis? We need homes.. new thinking, and a new tax?

By Doug Saunders, Globe and Mail, April 28, 2012
“It used to be easy for a young couple to find a place to live. But this new generation is coming of age without access to decent housing. Even if they get a good job, they’re priced out of the market, forced to live as adults with their parents, or settle with cramped living conditions.”

Does that sound familiar? It should. In recent weeks, I’ve heard people utter almost exactly these sentences about their neighbourhoods in Washington, in Beijing, in Nairobi, in London, in Mumbai and in Toronto.

If there is a global problem, this is it: There is not enough housing, to rent or to buy, at a price that people with decent but ordinary employment can afford.
We have come to think of this as a natural state of affairs. In fact, it makes no sense at all: Housing is a basic, easy-to-create amenity. If there is a large demand, and people are willing to pay, shouldn’t there be plenty of people who want to make a buck by creating it? It should be one of the world’s more basic markets.
But it isn’t. Here in London, there will be 374,000 new households over the next few years chasing only 214,000 new housing units. In Toronto, there were 9,000 vacant rental units in 2010, and around 70,000 households in the market for one. In Beijing, average apartments now cost 27 times the average salary. People, for some reason, don’t want to go into the housing business.
Mind you, people do want to go into the real-estate business: The buying and selling of property is a red-hot market in most countries. It’s just that people don’t want to put more housing on that land.
We have come to see property as a portfolio investment rather than as a basic amenity. So for those previous-generation middle-class people (like me) who do own homes, a market failure looks like a gift.
“Every time house prices fall, the national newspapers say there is a housing crisis,” says Alan Gilbert, a housing-policy specialist at the University College of London. “I would argue otherwise – the housing situation is better when house prices are stable or falling – because that means that demand is being outstripped by supply.”
I met Dr. Gilbert at an Oxford University summit on the housing shortage. What’s most interesting is that the housing crises in places like Kenya and those in places like Canada have the same basic causes.
Those fast-rising (and occasionally fast-falling) property values are a big root cause. After being burned in the subprime crisis, banks are wary to lend to new home buyers – it’s hard in North America and Europe, even harder in China, where you can only borrow 50 per cent of a home’s value, and you have to be rich; it’s almost impossible in Africa. I was told that the governor of the Bank of Kenya isn’t paid enough to get a mortgage in Africa.
Worse, banks are even more wary to lend to people wanting to build any but the most expensive rental-housing projects. That’s because property values rise so fast that the project’s rent-based business model might not make sense after a few years. And there are rarely government incentives (such as tax breaks) to create equity-financed rental housing, which should be a priority.
Governments seem supremely uninterested in making the creation of housing a desirable pursuit. We’re clogged with zoning policies, rent-control laws, minimum-frontage restrictions, planning requirements – none of which do any good – and, most of all, a shocking fiscal bias toward existing owners.
If we really wanted housing to be profitable and plentiful, we’d tax owners on the annual rise in value of their property – a Land Value Tax. This has two benefits: First, you’re taxing a non-productive source of wealth, whereas income and corporate taxes can stifle innovation and risk-taking.

Second, because buyers and sellers know the tax exists, property values stop rising quickly. This makes it easier for newcomers to enter the property market, and for homeowners to buy and sell based on the desirability of housing.
It also means that investors make their profits from land not by pocketing its increase, but by improving its income value – collecting rent, increasing the quantity or quality of housing on it, pressuring government to allow better or more intensive use of the land.
When people can live fairly well, in large numbers, close to their places of work, the economy functions far better. When a few of us are making useless paper profits from our homes and the rest are stuck outside the market, it hurts everyone.
"If there is a global problem, this is it: There is not enough housing, to rent or to buy, at a price that people with decent but ordinary employment can afford."
Let's look at some of the perhaps obvious reasons.
We, as a culture, favour our past over a different future because we know we it was, and we are uncertain about how change will unfold.
We also, in that mind-set, favour the rich over the poor, as part of that past, and even increasingly permit the rich to purchase power from the political operatives, without considering how we might push back.
We also have an archetype about land, as a source of investment, and we generate both regulations and restrictions, as our way of demonstrating our "planning" capacity, making political players think and believe that they are "protecting" the investment of those who already own land, and do not want anything to bruise the potential value of that land. Really we are "gate-keeping" for the have's (those owning homes) while keeping the "have-not's" out of our "sanctuaries"...gated or not.
We, as a culture, feel and believe that we have little or no influence on national or provincial political agendas and land-use is the responsibility of local legislators, who are closest to the developers whose history of development and whose political contributions keep those political actors in office. New housing developments demonstrate "progress" to passing-by citizens between elections, as well as new tax revenue to the town and city councillors, while preserving the access of the developers to more land and more building, for those who can afford.
And as is very often the case, there is another very human ingredient at play here, not only the political ambition of the politicians, but the greed (private profit motive) of the developers, the real estate profession, the renovation industry, the furniture industry (Lowe's current sell line: "Always keep improving!" speaks to the built-in need to continually renovate) and it has become analogous to the fashion industry....changing colours, flooring, appliances and amenities to "improve your life-style and to increase the untaxed value of your dwelling for sales purposes. And like teens demanding the latest fashion shoes, we lemmingly fall in step with the "investment" and renovate and "growth" model of business as consumers to the point that the U.S. economy is now 75% driven by consumer spending.
There are slum landlords in every town and city, skimming high rent for low quality living accommodations, often at the expense of university and college students who are legitimately living 'away from home'. And there are rich investors making a 'killing' in profit terms, by renovating old and run-down premises, and flipping them to needy purchasers. In the U.S. in some markets, investment companies are consuming all those foreclosed properties, at a fraction of their original cost, throwing some paint and a few "cosmetics" at them, and flipping them at huge profit gains. And they are receiving the praise of the "opinionators" who are, themselves, caught up in the "recovery" metaphor, mind-set and political culture.
Ironically, it was the housing "bubble" that started the whole slide down the slippery slope of debt and deficit and recession in the first place, when wild-west-bandits saw a "legal" loophole to make a killing on the unsuspected, innocent and naive purchaser who needed a home, and wanted one they could not afford.
So while Mr. Saunders may be right, that housing is in short supply and needs a Land Value Tax, as a way of capping the over-heated, unregulated pursuit of profit, we have to collectively take action that breaks the incestuous relationship between money and politics in order to begin the process of even thinking about providing legitimate housing, at affordable cost, to the millions who are currently "barred" from the inn, as were those in a old and revered story, that we celebrate in December in the west.

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