Thursday, 11 August 2016

Working Women and the Housing Crisis

     John and Marsha are yuppies in the original sense: Young Urban Professionals. Buying a house was not a problem - that is, until they started a family. Then they had to renegotiate their mortgage. They do not think they can afford more than two children; the cost of housing is just too great. Julian is a 40-something bachelor. Despite receiving half the proceeds of a house sale a decade ago as a legacy, he is still renting. He does not think he will be able to afford to buy a house unless he acquires a second income by marriage - and, of course, children would be too expensive. Time is running out if he wants to get a thirty year mortgage. Our society has never been so affluent, yet its natural reproduction rate is below replacement and we are struggling to own our own homes.
     Meanwhile, back in the world we used to inhabit, my father was an unskilled labourer, and my mother took only part time and casual work. Yet they managed to pay off a house and raise two children. What on earth has happened in the interim?
[T]he number of weeks of work, at an average wage, required to purchase an Australian capital-city median-priced house declined sharply, from 301 in 1950 to 200 in 1955, and this figure remained steady through to 1970. . . . Today the number of weeks of work, at average wage, required to purchase the average house stands at 455. [John Howard, 2014, The Menzies Years, p 372]
     Financial advisers recommend paying off a mortgage at $8.50 per month per $100,000. Work that out.  For a mortgage of $400,000 (which is by no means exceptional in certain capitals), this comes to more than half the average full time after-tax income - and, by definition, half the population are below the average. Any suggestions how this can be done without a second income?
     This reminds me of a conversation I had with my friend, Ken thirty years ago. While we were at university together, his politics had been somewhat left of centre, but maturity and fatherhood had had their usual effect.
     "It is an old principle that you can't get rich farming rented land," he said, "because the rent is based on the productivity of the land. Many shopkeepers have found this out about the big shopping centres. They get lots of customers, and because of this the rents are very high, so they end up essentially working for the owners of the centre. House prices are high for the same reason. The advantage always lies with the owner of the land."
     "Now, wait a minute!" I responded. "What about the law of supply and demand? As cities grow, land prices are bound to rise, because there are more people chasing a diminishing supply of land."
     "Yes," replied Ken, "but if everyone's income were suddenly halved, the house sellers would have to lower their prices in order for people to buy them."
     Let's analyse these propositions. The cost of a home involves two items: the house and the land. The value of a house is ultimately set by how much it costs to build it. All other things being equal, a large house will cost more than a small one. And because people don't mind purchasing an old house, provided it has been maintained in good condition, houses do not depreciate in value like cars.
     The cost of land, however, is based on two factors: the size of the allotment, and the position. For example, I now live just a few kilometres inland from the working class suburb where I grew up. But homes in my childhood suburb are more expensive than comparable ones where I now live because the latter are closer to the sea - even though no-one can realistically swim in it. And there isn't an infinite number of allotments in desirable positions: by the seaside or riverside, with a view, close to amenities and places of work, etc. This is why I was correct in pointing out that, as a city grows, house prices will increase.
     However, because the value of land is based on its position, rather than any value the owner can add to it, it is flexible. A rich man might be prepared to pay two million dollars for an average house in a superb location, but if all houses cost two million dollars, no-one could buy them. The seller must keep his price within the ability of buyers to pay. This is why Ken was right in saying that if everyone's incomes were halved, house prices would have to fall. There will never be a time when the average family will not be able to buy the average home. They might, however, have to forego some other costly items - like children.
     But another issue is also at work. If meat were prohibitively expensive, we would all become vegetarians except on special occasions. If cars or petrol were prohibitively expensive, we would revert to public transport, bicycles, or walking. If the cost of clothes went up, we would do what our ancestors did: make our own, wear fewer, wear them longer, and patch them. Everything can be done without or done with less.
    Except houses. Everyone has to own one, or rent one from somebody who has a spare. This was why Ken said that the ultimate advantage rests with the owner of the property. Essentially, there is a lot of money chasing a finite resource, meaning that the seller can raise the price and the buyer will have to grin and bear it.
    Probably this would have meant that home ownership would take up more of a family's disposible income as population increased. But which families have the most money, and are thus forcing up the prices for the rest? Those with two incomes.
    "As far as I can see," said Ken, "the major economic effect of married women entering the workforce has been to raise the cost of housing."
    That was thirty years ago. Time appears to have proved him right, hasn't it?