Property bubble and housing affordability
Last updated: Monday June 14th, 2021
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Introduction
You may have experienced it yourself or hear it from the news that property prices in many parts of the world are rising rapidly. In many major cities, property prices outpace inflation and wage growth, making home ownership increasingly impossible for first home buyers, young families and people in lower socio-economic class. Housing affordability has become an increasing social issue, leading to widening wealth inequality, class division and social unrest. This blog tries to examine briefly the cause of this property bubble and what it means for you.
Where are some of the world most expensive and unaffordable properties?
Unlike other asset class such as gold or shares, properties differ widely and it is not easy to compare apples to apples. The simplest way is to look at price per square metre. According to Numbeo, below are the top 10 most expensive cities to buy an apartment in the city centre (US$/square metre as of June 2021):
It means that to buy a 90 square metre apartment in the centre of Hong Kong would cost an average US$2.9 million or HK$23 million. (90 sqm or 969 sq feet is considered the median apartment size in the world, which in Hong Kong is well above average)
However, simply looking at prices can be misleading because of the different exchange rates, income and tax levels and cost of livings around the world. The more common way to look at housing affordability is to compare the price to income ratio, i.e. median apartment prices divided by median annual family disposable income. According to Numbeo, these are the most unaffordable cities in the world:
It means for an average family in Damascus, if they do not spend anything on food and other day-to-day expenses, it would take them 76 years to save enough money to buy an average apartment in the city. (ouch!)
High prices: a case of supply and demand
To understand why properties are so expensive, let's examine the basic of economics in terms of supply and demand. In the above listed and other cities with expensive properties, they all have a number of things in common:
Supply
- Limited land: Many cities have limited land available for housing. Land supplies in some cities are naturally limited by their geography, such as surrounding hills, forest/national parks, sea/lake/river or border.
- Poor urban planning and infrastructure: On the other hand, when a city has a lot of land, it can suffer from urban sprawling which makes people live far away from the city centre. Public transport is sometimes non-existent and not economical due to low population density, and people have to spend a lot of time commuting. Often owners of land and big houses near the city centre are unwilling to relinquish their lifestyle and redevelop into higher density housing. Therefore there are only limited supplies of housing in areas with good infrastructure and not too far away from job and education centres.
- Low supply of desirable housing: Although some cities may have good supply of housing, there are low supplies in housing that people really want to live in, i.e. there is a mismatch between supply and demand. For example, many third world countries have a limited supply of modern housing suitable for their growing middle class and expatriate communities.
Demand
- High urban population growth: The world is experiencing increasing urbanisation, as people move from rural areas to urban centres in search of better job opportunities and lifestyle. Many developed, English-speaking cities with high liveability see an influx of immigrants from other countries, especially from the developing world.
- Investors and tax policy: Properties are of course purchased by investors as well as owner occupiers. Major global cities can attract investors from all over the world, and locals have to compete with cash-up investors. Some countries have favourable tax laws and incentives for investors, further supporting property prices.
- Ultra-low interest rate and Quantitative Easing: Since the GFC, central banks around the world have lowered their interest rates to almost zero or negative, as well as "printing money" by purchasing bonds. The situation was exacerbated since the COVID-19 pandemic with record high unemployment and unprecedented economic difficulties. While the aim is to boost economic growth, the consequence of this flood of money is the inflation in asset price, including shares and properties. Low interest rate means people can get cheap mortgages and afford more expensive properties. It has been said that we are now experiencing the lowest interest rate in thousand years of human history.
- Fear of missing out (FOMO): As properties are getting ever more expensive, people are trying to "get on board" as soon as they can. History has proven that properties are relatively safe investment with stable and good return. Many people are now buying their first property as investment, as they only have enough money to "get into the market" but cannot afford to buy one that they want to live in.
What does it mean for you?
- Widening gap between rich and poor, urban and rural: Those who already own properties in large cities are getting richer and richer, while the poor are ever less likely to be able to afford owning their home, no matter how hard they work. A person's wealth is increasing dependent on how much asset they own, rather than how much money they earn.
- A lost generation: The younger generation are now staying home longer with their parents as they cannot afford to buy or rent on their own. In many cities, the young simply gave up hope of ever owning a home if they do not get help from their parents. It has been said that this is the first time since World War II that the lives of the next generation are worse than their parents.
- Reduce innovation and business investment: Residential building construction is a rather low-tech industry with few innovations. As more money are poured into properties, there are less money invested in businesses and research and development.
- Civil unrest and class revolution: Housing unaffordability causes many social problems, from homelessness to civil unrests where the younger generation and the disadvantaged are getting more dissatisfied with their government, big corporations and the higher social class. And remember, Communism started as the struggle for proletarian liberation.
Conclusion
The pandemic has seen a trend for people to move away from the cities as remote working has become a norm. However, with the ultra low interest rates, many cities are now experiencing the most rapid rise in property prices and there is no end in sight.
There may be little we can do to resolve the problem. Meanwhile, let's just play some of my quizzes and lament over the situations (or celebrate if you are already "on-board"...)
Cities with the least affordable housing
Also, I want to know how you did that graphics. CSS?
You think it’s only up-to-date for a few of the countries?
I think the data on Numbeo is crowd sourced, something like Wikipedia. For major cities, the numbers are quite accurate and up-to-date, but probably not for every cities.