The Global Housing Affordability Crisis:

Housing prices are rising faster than incomes in many areas of the world, reducing well-being and engendering social discontent. Passivity by municipal and national governments is no longer an option. In this essay, I will describe the tradeoffs between different housing policy objectives of governments and the public. I suggest that policy goals should be made explicit, and their tradeoffs acknowledged. Due to the durable impact of real estate development, housing, and land-use policies should seek broad inter-partisan consensus.

To avoid pernicious general equilibrium effects and because of limited public resources, subsidies ought to be carefully targeted. I will describe the thirty major economic strategies underpinning housing policies worldwide and discuss their main advantages and caveats.

Effective housing programs must skillfully deploy a combination of these basic economic strategies, as I will illustrate through several global case studies. Programs should be carefully designed to anticipate behavioral responses from individuals, firms, governments, and markets. Unideological and professional implementation is critical for their success.

Rising housing costs in various parts of the world are challenging people’s well-being—fueling anger and resentment. This is especially true for renters and young families who are new to the housing market and didn’t benefit from past increases in property values. The reasons for this global housing affordability crisis are varied, and therefore, solutions will necessarily be heterogeneous. In my view, five main theories account for the reasons behind this phenomenon.

First, growing income inequality in many countries signifies that the wealth of low-income and middle-class populations has stagnated (Alvaredo et al., 2018). This problem is not necessarily attributable to inefficiencies in the housing market (Glaeser and Gyourko, 2017), and may require broader redistributive and educational policies.

Second, automatization, IT, and expanded global supply chains have accelerated the productivity growth of manufactured tradable goods with respect to services and non-tradable. Real estate is the ultimate nontradable good (Bardhan et al., 2004): construction is typically local, and desirable land is unmovable. Therefore, a sort of “cost disease” (Baumol, 1993) may partially be behind the increasing expenditure shares on housing consumption (Albouy et al., 2016). Also, a few prominent cities have experienced inflation of construction costs above their national averages (e.g., Gyourko and Saiz, 2003).

Third, some of the most popular cities—with better amenities, access to education, and highskill better-paying jobs—have disproportionally attracted residential demand (Glaeser et al., 2001; Glaeser and Saiz, 2004). Several of them are in coastal or mountainous regions, which limits their potential for geographic expansion (Saiz, 2010). The high income elasticity of demand for amenities, together with the fact that they grow endogenously in attractive areas (Guerrieri et al., 2013), generates a virtuous cycle of ever-increasing concentration of housing demand.

Fourth, not-in-my-backyard (NIMBY) anti-development pressures have grown as societies mature worldwide. Increasingly strict municipal policies and regulations make building new housing at high densities very difficult. In attractive cities, land values have been escalating, and modest-quality homes are almost impossible to build anymore.

Fifth, a global savings glut may have both decreased mortgage rates and increased the appetite of a growing base of global investors to acquire real estate, absent better alternatives (Badarinza and Ramadorai, 2018). There is strong global evidence that housing price growth tends to accelerate with credit expansion (Cerutti et al. 2017).

The solution to housing affordability problems requires a combination of economic growth, local entrepreneurship, and improved family agency. Municipal and national policies are critical to empower families, communities, and ethical real estate developers. Governmental and local institutions that fairly redistribute resources to equilibrate purchasing power are also needed.

In this paper, I focus on governmental action and discuss potential affordable housing policy options. This is not because I believe that the public sector is solely responsible for the solution of the affordability conundrum. On the contrary, organic, bottom-up innovation from firms and communities is bound to be as important. However, governments set up the rules and have been part of the problem in some countries.