HOUSING: AFFORDABILITY and FORECLOSURE

A major element in the economic and financial disaster of 2008-9 has been the phenomenal rise and catastrophic fall in house prices.

This begins with the great myth of a "home-owning democracy". You may think you're buying a house but in reality the bank is buying it, the bank holds the title, and you live in it as long as you keep the payments up. Loans to hopeful home-owners provide the banks with a profitable and relatively secure way of making money, so not surprisingly banks and mortgage brokers found ways to make unaffordable mortgages appear affordable, and young first-time buyers were lured into the market.

With classic "self-fulfilling prophecy", demand increased, values went up, speculators jumped in buying second and third “investment” properties until, again with classic predictability, the balloon burst. People lost their homes as the banks foreclosed, becoming in effect owner-managers of vast quantities of unsaleable houses. So much for "a home of your own". And it'll happen again of course.

A decent home in decent surroundings is one of the foundations of a civilized society no less important than education and healthcare, and we need a core of affordable, at-cost rental, rent-to-own or leasehold accommodation which will serve first-time buyers, and can act as an “anchor”, a realistic cost foundation which can effectively limit the free property market from excessive inflation and over-evaluation.

Regional Development Banks, through Regional Housing Corporations, can provide low-cost financing for new housing, for rental or lease “at-cost”.

The Housing Corporations should acquire “grey” ex-industrial, or unused agricultural land at its current price, rather than an inflated “with planning permission” price. When owners of land currently valued at agricultural rates sell at a huge, planning-generated profit to developers, the houses they build are already on the way to becoming unaffordable. The object should be the construction of quality, environmentally attractive cluster housing, yet built using techniques of fast-track mass-production. Availability of at-cost housing would make it possible once again for young families to afford that most basic of all needs: a decent home in pleasant surroundings.

In terms of the overall housing market, the availability of at-cost housing would act as a brake on price-acceleration in the open market. A key foundation element of a civilized life must surely include a quality, affordable home in pleasant surroundings within convenient reach of recreational opportunities and commercial facilities. A degree of stabilization in the housing market is essential if this aim is to be fulfilled.

In the general hoopla and jubilation over rising property prices, it is rarely if ever observed that rising property prices and rental costs in urban centres are economically regressive, a fact which classical economists decline to recognize. Prosperity is created by productivity, by increasing value without increasing cost. Rising land prices do just the opposite: they increase the cost of land without increasing its inherent value. And this has a similarly inflationary effect on the services using land, which become more expensive not because they are offering increased value but simply because rents are going up. “Value” in the sense of what buyers get for their money, decreases as land prices increase. This is particularly evident in major cities.

There is little or nothing in the way of goods and services which is not affected by the price of land; rising real estate prices in towns and cities affect everything from offices to retail shops, cafés, and places of entertainment. The escalation of land prices is a major contributor to the high cost of urban living. It can also cause a deterioration in urban quality of life; many of Europe's old established city cafés which have for centuries been centres for meeting and socializing are now being forced to close as a direct result of escalating rents. Likewise the demise of urban centres in the USA came about when steadily increasing rents finally reached the point where businesses could no longer afford them and moved out instead to cheaper green field sites thus creating new suburbs.

If the city or town centre is to retain or regain and develop its function as a gathering place, it will be necessary to ensure that newly developed areas in city centres, particularly areas reclaimed from public or industrial use, should be subject to price stability so that rents are economic for those low-profit uses such as public markets and cafés which, while lacking high profit potential, provide vitality and enjoyment for the community.

This could be accomplished, for example, by vesting tenure in the hands of a locally administered Urban Trust, which would then ensure maintenance and management of the facility. Regional Development Banks can provide finance to equip public markets, the kind which exist in almost every French town and provide facilities for the exchange of locally made produce, thus in turn creating opportunities for cottage industries and rural market gardening, again financed through the RDB.


The Economics of Prosperity

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