Can't afford housing? So redefine affordable!
Housing prices falling is bad news -- and good news
Even though housing prices are cooling off, you'll still have to wait quite a while before they become as affordable as they were five years ago when even then many working families could not afford to own their home. What's being done? China's doing something. America could do much more.
by Jeffery J. SmithCan you afford the American Dream? Many working families along the coasts cannot. Their wages have not risen (after allowing for inflation) while the cost of housing has gone through the roof.
The government agency concerned with housing affordability have done what they can. They redefined affordability. Their old cut-off used to be 20% of household income spent on housing. But when the national average crossed that line – it’s now at 21% – they took another look at struggling families and figured as long as they managed somehow, then paying almost a third was OK. So now the official definition of affordability is paying up to 30% of household income for a roof over their heads. (The Oregonian, 2006 October 3).
Lately, sellers have been running out of P.T Barnum’s favorite people with enough money to meet these still sky-high prices, so demand is down. As lenders have repossessed the homes of borrowers in default and dumped their houses on the market, supply is up. So the price of a single-family home has slipped a bit, but not enough for many workers.
At the same time, the cost of apartments can climb the other way, since more people need them. Not just defaulters but also prospective buyers patiently waiting for home prices to slide further or deterred by rising mortgage rates, they all add to demand for apartments. Meanwhile, many owners have converted buildings to condos, subtracting from the supply.
Builders try to meet that demand. In May, their authorizations for new apartment buildings and condo projects increased overall building permits by 3%. That bump-up came despite permits for single-family homes dropping to a 10-year low. Completions of housing units fell to the lowest total in six years. In the first five months of 2007, permits are off 25.7% from the same period a year ago.
The builders’ confidence index fell to 28 in June, meaning that less than a third of them figure they can find more customers. The reading of 28 marks a 16-year low (Rex Nutting, MarketWatch, June 19), close to the 18 years that mark the peaks and troughs in the land price cycle. For the last decade, builders’ confidence has been an excellent harbinger of economic swings, giving us yet another reason – along with higher mortgage rates and the inversion of bond yields (short ones paying more than long ones) – to expect a recession in twelve months or so.
To stave off recession in China and make housing affordable, the government didn’t redefine affordable. They taxed land. Their latest move was to let Shanghai tax the rise in location values (it’s not the buildings rising in value since they’re aging, and wearing out) anywhere from 30% to 60% when a speculator (a short-term owner) sells out. (Cao Qian, Shanghai Daily, 2007-6-14)
“Ouch,” you say, “now buyers must pay a high price and a tax on top of that?” But was that “ouch” or “aahh”? In experiments, when subjects had to give to a charity, the part of the brain that lights up from food or sex also rewarded these pseudo-taxpayers. Subjects who voluntarily chose to give money, their brains lit up even more – but apparently not enough. People given the choice gave 10% less than subjects who had no choice. (Joe Rojas-Burke, The Oregonian, June 15)
Was that as good for you as it was for the tax collector? Don’t worry. A tax on land does not make you pay more, it just makes you pay someone else -- not the seller but the government. See, if owners try to raise their price to pass on the tax, then they lose the business of people who cannot afford to pay more. Yet owners still have to pay the tax. So what they do is lower what they charge by the amount of the tax and keep their buyers or tenants.
Works like a charm, every time. Indeed, back when Pittsburgh taxed land, residents enjoyed the most affordable housing of any major American city. And when people spend less on housing – actually, on the land beneath the housing – then they can spend more on human-made goods and services, keeping economies humming along.
Jeffery J. Smith runs the Forum on Geonomics.
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