Why can't we house the homeless?
A few years ago a friend of mine Oliver was interested in what would be involved in fixing the growing issue of homelessness in Melbourne and I remember clearly having conversations with him and others about what might need to be done to improve the situation. One of the ideas he had that I particularly liked was using modern technology to greatly reduce the construction costs for housing and thereby making more places available to people. I definitely think there's a lot of potential in rethinking building materials and and techniques, and not just for low cost housing, but for everyone. If the will was there we could do a lot better with how we make residential housing.
These conversations a few years back got me thinking a lot more deeply about why despite all this "progress" that homelessness had been getting worse in recent years. One unfortunate factor with homelessness is mental health issues. Some people are homeless because of mental health issues, and economics of housing availability has less to do with these cases. Despite many advances in the understanding of mental health it seems that the homelessness situation remains problematic. To deal with this form of homelessness effort has to be placed into mental health supports for people. Dealing with this isn't easy and it's honestly not something I know enough about to feel comfortable commenting on. Mental health issues did get me thinking about the overall decisions about where to expend efforts on a societal level however. Why do we make the choices we make about housing? Why do we make policy choices about housing that increase inequality? Are there differences between what people do on a personal level and the choices they pursue on a societal level?
The growing issue in Melbourne over the last decade or so has been homelessness driven by the huge drop in affordability of housing for many. This is what I'd like to address here.
A common sentiment has come up "We have had great increases in technology and have a highly capable construction industry, so why can't we just increase housing supply and give homeless people a place to live?" There was some time in the last 10 years where I remember the amount of homelessness going up. Where I grew up was in a relatively speaking poor area where in the 1990's a surge of opioids and associated drug dealing got noticeably worse, but despite this fewer people were sleeping rough then as compared to now. While conditions changed in the early 2000s to make these drugs far less available homelessness started to get worse not better, I doubt less illicit drugs being available is the main driver increasing homelessness. But if it's not this then what are the actual causes?
Overall basic shelter can be made for people at an ever decreasing cost. As with anything that humans desire strongly enough the costs of manufacturing of such items is drawn lower as time goes on. This force, cost-gravity, is very strong over time as it is a manifestation of the human desire to improve our living conditions. We have seen the introduction of new building techniques that can greatly reduce the cost of shelter for people and the rise of community initiatives and non profits to tackle these issues. Strong progress is inherently deflationary in nature. All other things being equal (which they obviously are not) the cost floor of creating new basic no-frills housing has dropped. The community will is there and the technology exists to solve this problem in countries like Australia and according to traditional economic metrics the economy was stronger than in times past, so naturally people naturally ask "why is this still a problem?".
Housing availability is talked about frequently as the topic is one of importance in many places in the world, in all the countries that I've spent significant time in this has been an issue recently, this I would argue is not a coincidence. Stable supply of housing is a very important part of generating wealth and stability for a nation and secure access to housing is a great way to improve the well being of people. In many places housing affordability has been declining in the last decade and homelessness has become more of an issue. People have wrote about these issues from before the 2020 pandemic, it's just the pandemic has made the issues of homelessness far more obvious as it has become a health issue on top of a social one. Given the complete hysteria around the pandemic all the homeless that wanted a place to sleep under a roof got one, with enough fear the political will to house the homeless got sorted out in a remarkably short amount of time. Unfortunately there's still some people with mental health issues sleeping rough at the moment but like I said earlier that's a separate issue with different needs and different solutions. Beyond virus fears there's economic fears, the real estate market in Melbourne's central business district is set to completely collapse because of the policy decisions taken with the lockdown leading to a crisis in long term confidence. Demand for both commercial and residential real estate in that location is set to collapse, the only reason the numbers haven't reflected this is because during the lockdown real estate inspections have been banned and travel is also heavily restricted. Looking beyond the lock down people are now seeing creating housing as a way to do something that's both socially useful and as a way to help economically get out of this pandemic of 2020 induced slump. This is one of the directions that the Keynesian's are seeing as a potential stimulus option. This sentiment is seen in recent articles like this article calling for more investment in social housing during a pandemic, that are talking about how investing in housing might be a good way to get out of the economic slump caused by the pandemic of 2020. But how come in the decade before the pandemic we supposedly had years of economic "growth" but the homelessness problem got worse and not better?
Just "stimulating" the economy unfortunately doesn't magically solve every problem, across multiple decades of economic grown homelessness got worse because the will was not there to actually deal with the problem. A strong economy can gave a lot of resources but choose to not deploy them in response to an issue. Even though that Melbourne University article is talking about economic recovery it, like many other articles about housing shortages, doesn't talk about the huge elephant in the room which is that housing has become an extreme asset bubble in Australia. This asset bubble is driven by artificially low interest rates that are now in negative real terms. Perhaps one of the most striking impacts occurs when interest rates get negative in real terms because this strongly drives asset bubbles by people wishing to preserve their purchasing power.
As long as there is an asset bubble with housing we will have extreme difficulties in providing enough affordable housing. The economy getting "stronger" could actually make homelessness worse depending on how those economic gains are used. For example if people decide to park their money in residential housing as a speculation without any plans to actually lease it out then a stronger economy that allows more investors to buy housing could make things worse not better. The reason is that just like the toilet paper panic of 2020 you can have a situation where if you made more toilet paper the supply would just be immediately taken by hoarders who are buying the toilet paper not to use it but to speculate on the future price of it going up. I unfortunately see this dynamic on the exact same block I am typing this post on, there's 2 investor owned properties on this block alone that are perfectly habitable but have been empty long term. Nearby there were also some residential buildings where the construction was stalled for over a decade due to financing issues despite this being one of the biggest decades of returns in that area on residential housing. Increasing the supply of housing will only start to put a dent into the homelessness situation if those houses are actually made available to people who need a place to live.
So why do we have empty houses despite a housing availability crisis? Why does the price of houses keep going up?
No discussion on housing can really be complete with covering the Not In My Back Yard phenomena. This type of behaviour is so common that it's often referred to in common conversations by it's acronym NIMBY. There's also a culture counter to this known as YIMBYs or Yes In My Back Yarders.
The problem with many NIMBY positions is one of cognitive dissonance, when there's obvious policy problems that have to be addressed if that involves some inconvenience to you it's really easy to say that the the problem should be dealt with by someone else somewhere else. This is especially notable, and annoying, when people have a political position that's in favour of something just so long as it's somewhere else.
In very few areas is the NIMBY phenomenon stronger than it is in housing and real estate. Many home owners don't want to create affordable housing in their neighborhood for fear of reducing their own house prices. Many people aren't brave enough or honest enough to actually say this in conversation. Some come up with a litany of other justifications to avoid being truthful, unfortunately the lies start to get internalized sometimes and people lose understanding of what's going on.
If people allowed local affordable real estate to be more available then the housing shortage would be pretty much over. An increase in supply of housing near where people work and where their community connections are would both give people homes and have massive second order effects due to a reduction in the scarcity of housing stock. Unfortunately the preferences of the NIMBY crowd as shown by their actions puts the inflation of their own house prices above that of allowing other people a place to live.
A solution to this is a complete reframing of residential real estate as primarily about giving people places to live and far less about speculation. If collectively we value people having secure housing more than we value individuals profiting off of real estate speculation fewer home owners will take the mental framing where they see their own homes primarily as investments rather than as homes. We must be careful here to distinguish between real estate development and speculation. Developing real estate can add substantial value in a way that speculation cannot, and those who work to improve the living conditions of people are definitely worthy of getting paid for these efforts. As mentioned before real estate development can actually hurt the pure speculators value by creating much needed supply and we might see negativity towards developers from speculators as a result. It can be enlightening to consider if people dislike development due to their speculative investments losing value as a result.
The biggest thing that's pushed the housing bubble to it's current inflated state is artificially low interest rates combined with lax lending requirements. When lending standards get lax enough you get disasters like the sub-prime mortgage crisis that happened in America. If you are interested in how that played out I'd highly recommend watching the movie "The Big Short" as it's a fairly accurate and informative portrayal of some of the events. All the way up until the crash many people were patting themselves on the backs for how "good" they were at investing in real estate because the prices kept going up, until they didn't. A lot of people are only able to think in nominal terms, and this sets up a number of huge psychological distortions when people try to assess the quality of their own decisions in real estate.
Artificially low interest rates push asset bubbles to extremes. Add in high inflation and the rush to "safe" assets gets extreme. Add in leverage and you get all of the signs that a bubble is inevitable. The other thing that's happened as a result of high inflation and low interest rates is that the purchasing power of the Australian dollar has gone down, but what this does is inflate real estate prices. Because a declining dollar makes real estate look more expensive when it's not actually gained any value you start seeing people who have gained no real wealth thinking that they have because in nominal terms their investments are now worth more dollars. Unfortunately they will find that their dollars when they sell their real estate buy a lot less than they used to, but this is a painful dark realization people have later and tend to not tell other people about. If this has happened to you take some comfort in knowing you are not alone, the decline in the purchasing power of the dollar has taken many people including me by surprise.
Many people gloss over these aspect of the Australian housing bubble despite it being by far some of the biggest factors in the high price of housing in Australia. Unlike in the USA Australia mostly avoided the housing correction from the subprime mortgage crisis for a number of reasons. As a result the leverage in Australia remains very high and there's even policy that rewards people via tax incentives for taking on debt, more about Negative gearing later.
What this has resulted in is a society that's highly leveraged with high levels of debt servicing these house purchases. The same amount of wealth is contained in houses but the amount of debt as a percentage of the average house has gone up enormously. Higher percentages of debt burden mean less accessibility to housing for anyone who is unable to get a loan, it also has hugely negative impacts for the entire economy too.
The Australian situation
For the most part I think the housing bubble in Australia is explained by the prevalence of very low interest rates, if I had to give one reason why housing in unaffordable it would be this. Overcoming NIMBY resistance to increasing the supply of housing is tough in the best of times, but in an over-inflated bubble market this gets expensive as well as politically difficult, with the growing monetary expense being an easy target for the NIMBY opposition. With many people's "wealth" mostly determined by the "paper" valuations of their houses adding supply is seen to detract from this "wealth". As the events of the 2020 pandemic have shown, we got pretty much all the homeless people off the street without even solving the housing affordability problem. This clearly shows that if the political will is there the problem can be solved. The main reason the monetary policy hasn't been tackled is because the vast majority of people don't even realize that the problem exists and many don't understand the details of the problems with current economic policy.
Housing bubbles built on the back of cheap debt is a growing problem worldwide. That said I think there's a few uniquely Australian aspects to the homeless issue caused by the housing affordability crisis here.
As long as I have lived there's been a national obsession about home ownership.
This is a cultural phenomenon that's been very strong in Australia over the last few decades. You see this represented in the various TV shows that are to do with real estate and home improvements, they are a very popular form of entertainment. I started to get a sense of how much Australian's obsessed over real estate, and in particular home ownership, when I worked overseas as an ex-pat for many years. During 2011-2016 I spent very little time in Australia and it was noticeable how much less people talked about real estate in casual settings during that time. This however was noticeably different when I was in North America in 2019, people were talking about the rapidly rising costs of some real estate despite a lack of economic or wage growth. Those discussions were mostly driven by the fear of ones savings being eroded by the negative interest rates situation or missing out on gains from a growing asset bubble in real estate. Those same sorts of economic impacts were being felt strongly in Australia too but there was still a lot of cultural interest driving these discussions about real estate with topics like home improvements and renovations being popular. Unlike overseas fewer Australian housing discussions were driven by the fear of missing out on an asset bubble. I think this was in large part because the asset bubble in Australia started earlier and via stricter lending regulations didn't blow up as quickly as it did overseas, but likewise the bubble hadn't burst in the interim either like the subprime mortgage crisis in 2007 in the USA.
In 2020 as a result of rent moratoriums and eviction bans along with a whole host of other major impacts on the housing market we see the topic of housing availability come up again. The situation is clearly quite dire and talk of a foreclosure and evictions crisis is now widespread in many countries.
The effects of low to negative interest rates has changed the situation remarkably however and has caused a growing accessibility problem for those who wish to enter into the real estate market. It's also caused a lot of people to fall into the very tempting trap of just trying to throw more debt at the problem. This will always be doomed to failure because growing leverage on real estate is a crucial part of the creation of the housing asset bubble in the first place.
What is stopping people from fixing the problem?
In a free market if you had such a substantial demand for a good then this would push new supply of that good. There's a variety of impediments to increasing the supply of real estate, from various zoning regulation issues through to tax implications through to NIMBY community push back on local real estate development.
Unfortunately the dark side of the Australian real estate obsession is that over time people have come to see their houses not as a place to live but rather as an "investment". People have a large chunk of their ego tied up in the "paper" wealth they own in the form of their houses. I see this with people I know and it makes me very sad. From an economic and political point of view it's also troubling because these valuations are not especially liquid. A rise in interest rates or a drop in the market could now wipe out a lot of people who are overleveraged in the housing market, this could in turn bring down many banks who have too much exposure to home loans.
What you'll find is an undercurrent of financial interests at play that make the fixing of this problem hard to get across the line on multiple fronts.
One peculiarity of the Australian system is a policy called negative gearing.
This I would argue is one of the worst policies that I've ever seen for housing affordability due to the particularly regressive second order effects it creates. In Australia a situation existed whereby if you lost money on an asset due to servicing the debt on those assets you could claim that loss against your taxable income.
Ostensibly the policy was designed to be an incentive for people to invest in creating new housing by making it "cheaper" for people to take on loans to invest in real estate. Unfortunately this policy made insufficient distinction between productive vs unproductive investments. Unfortunately cheap debt doesn't solve the fundamentals behind economic issues, and just like other times where money becomes plentiful prices rise due to the shift in equilibrium. House prices in Australia being no different. Negative gearing just shifts part of the cost of leveraged real estate investing onto the backs of the tax paying members of the country and further to every holder of Australian dollars via the debasement of purchasing power via inflation. This is a classic regressive policy that makes the rich richer at the expense of the tax payers of the nation and anyone who wishes to hold Australian dollars.
Basically Negative Gearing is a great example of the Cantillion Effect in action. Richard Cantillon was interested in the political economy in the early 1700s and was an investor in the Mississippi Company which was a company involved in creating an extremely large real estate bubble at the time. Perhaps one of his best insights was that there's a difference between money and wealth, and that the value of money changes over time due to inflation and deflation among other factors. Through his involvement in the Mississippi bubble he came to realize that the rates of inflation are not equal for everyone in an economy. New monetary supply has a localized effect on inflation where those who are closest to the money get to spend money earlier on in the inflationary cycle and the people further away from the money have their purchasing power reduced because prices inflate before they get access to new money. The way in which money travels in an economy matters a lot.
So in this way negative gearing makes it cheaper for people who already have access to cheap money to obtain more housing assets. These policies definitely push wealth inequality further because they subsidize the well connected over everyone else and provide a tax break to those investing in a bubble. The productive base that pays taxes is forced to subsidize the speculators in this entirely regressive situation.
An unfortunate trend has come up where people are buying real estate in Australia for investment reasons with no plan to actually use that real estate for generating yields. Since Australia was relatively stable and the government policies were all in support of expanding the asset bubble in real estate this was a rather low risk investment for people for many decades. The main issue is whether or not we should allow residential real estate to be turned into an asset class that is not used. Many countries explicitly set their policy up to disallow such usage. For example in Switzerland you have to pay money to keep a residential property empty. Many people bought property in Australia not because they assessed the underlying value but because they assessed the popular political climate wouldn't allow property prices to go down.
Unfortunately on top of this there's another imbalance which is that people from some other countries can buy land in Australia as "investments" even if Australian's couldn't buy land in those countries. I actually think the other countries have this policy right in many regards when it comes to residential real estate. Foreign investment is probably tolerated by the Australian electorate simply because it pushes up house prices combined with enough of the electorate being real estate asset holders. But such support is only possible when enough of the electorate actually owns houses and real estate assets, if enough of the electorate does not hold these assets such a policy is not actually in their favor. (Also note that some foreign investors are not citizens and therefore can't directly vote for policies that would prop up their asset prices)
Why this is currently troubling is that a lot of these "land banked" properties were empty even before the 2020 pandemic situation and this was artificially reducing the supply of homes for people who needed a place to live.
Despite this I still think monetary policy is a bigger issue than foreign ownership. In this case foreign monetary policy is also adding to the asset bubble in Australia because a lot of foreign ownership is driven by people wishing to maintain their purchasing power by having assets priced in Australian dollars backstopped by ongoing Australian government intervention in the housing market that explicitly operates to keep the nominal prices of these assets high. No doubt this is a great investment deal for many people, but the cost is somewhat borne by people who need a place to live but don't have one. If those other countries had sound money then the drive for people to buy assets overseas to protect their purchasing power over time would be greatly reduced.
The asset bubble becomes a force of its own
Given that Negative Gearing hasn't solved the housing availability issues you'd suspect that a discussion about it's repeal would be vigorous. As the demographics of the electorate are taking a major generational change this regressive policy that's generally enriched older voters will likely come under more pressure at the ballot box. Unfortunately as time goes on people get a vested interest in the policy continuing because they perceive it to personally benefit them, even if the policy hurts the overall market and makes the national economy weaker overall. There's a lot of other policies that are like this where cheap money is dispersed which then ends up propping up the real estate bubbles that exist in the world.
Unfortunately people are so drunk on the supply of cheap debt that fixing the issues with over-indebtedness would impact a lot of voters which makes a continuation of a broken system a political concern. This is a worldwide issue and some commentators have said we are increasingly "trapped" in a high debt paradigm. After all if you have a lot of "paper" wealth tied up in assets it is hard to accept policies that would reduce this "paper" nominal wealth even if it's overwhelmingly the best decision to do. This particular effect can be seen worldwide anywhere inflation is high and interest rates are low. And since we have seen this combination in many places in the world last for a few years now we unsurprisingly see some longer term asset bubble dynamics forming. Unfortunately many people prefer to own a million dollar house with a $900000 debt rather than a $100000 house with no debt. At the moment such indebtedness is advantageous for asset holders because inflation is high and interest rates are low. But unfortunately the reasoning many people have for preferring the more expensive property on paper is often far more unsophisticated than this, many people feel wealthier with a larger house price compared to a smaller one regardless of their real equity.
The world has seen many bubbles over the years, from tulip mania to other various forms of speculation we have seen what happens when a bubble starts to fuel itself. Extreme greed and mania has a way of preventing the better judgment of people shining through. After the Tulip mania ended laws were passed to try to reign in the excesses and prevent other such bubble. People buying financial instruments on Tulips is eerily familiar with recent events where people were buying massive options positions on Tesla stock. These sorts of bubbles tend to come and go relatively quickly however, leaving much destruction in their path.
But what we are seeing here is a bubble with such a long duration that the systems of the country have started to be changed to rely on the continued existence of the bubble. Because Australia avoided the subprime housing crash of the 2007 era and has avoided just about every other housing downturn in the last 25 years we have seen an unprecedented run of huge returns on real estate investments. 25 years is a very long time in the context of modern Australian political cycles and as time has gone on the system has started to change in such a way that it's relying more and more upon the bubble continuing to exist. The local banks, including the largest ones, would now be in extreme trouble if there was a downwards correction in house prices because many of these housing loans would be underwater.
One of the most pernicious ways in which the affordability of housing has been destroyed is by interest rates that are set by committee. The reason this is such an issue at the moment is because the world is increasingly finding itself in a debt trap where so much debt exists that any upwards pressure on interest rates would cause a tsunami of credit defaults. In a free market, one which we don't exactly have for interest rates, you'd see interest rates go up when savings have gone down. However we have a situation where people are pressured by all sorts of means to have minimal savings due to artificially low interest rates combined with inflation. When monetary policy explicitly keeps interest low and inflation high there's a strong pressure for people to invest in assets to protect their purchasing power. With a population such as Australia in which a large number of people in the electorate have home loans that represent a significant multiple of their income in debt you'll see strong political pressure against letting interest rates rise. This in turn causes an accessibility issue because home ownership starts to exclusively depend on the ability to acquire debt, with lower interest rates making it effectively impossible for anyone to save up enough money to buy real estate without debt.
But interest rates being systematically suppressed to low rates doesn't come for free. Mountains of cheap debt push asset bubbles and really accelerate inflation. Artificially low interest rates create great distortions in the economy and drive up the costs of producing things that people really need. If you've spent some time thinking about the cost of living you'll notice that it's gone up in a lot of areas of life in nominal terms. Unfortunately far too small a proportion of the electorate thinks of money in terms of purchasing power as the nominal amounts are frequently the only way people assess wealth. So the easy way out for policy makers is to come up with various policies that won't end the housing asset bubble but attempt to deal with the political fallout from a decline in affordability of housing.
This is where we see things like the first home buyers grant, negative gearing and the recent homebuilders grant. All these things have something in common, they are trying to deal with access to the housing market without ending the bubble. The treat the political symptoms of a broken system while making the broken system more entrenched. In this way they keep propping up the bubble which then makes the market less and less affordable for new entrants. Which in turn creates political incentives to take more taxpayer money to subsidize the entrants into the bubble economy which in turn adds more fuel to the bubble. This is a rather nasty cycle, and the people that lose out are the poor people and those who do not have the political power or connections to make use to the handouts. The people who have to subsidize all this are the productive members of the economy who form the tax base, which means this can't go on forever without the whole system facing a solvency crisis. Perhaps the best example of as a policy that accelerates the solvency crisis of the Australian system is negative gearing, where if you loan money for an investment property you can claim the losses in interest payments against taxes. If the artificially low interest rates weren't already low enough to entice investors into real estate then this policy came along. The productive people in the country who form the tax base, as always, foot the bill for this subsidy.
History states that eventually when the prices are not propped up by some real value a collapse in prices tends to happen when the bubble bursts. So why hasn't a collapse in prices of the Australian real estate market happened any time in the last 25 years? I think monetary policy is now the major driver, and as the system has rearranged itself to rely upon the bubble in real estate continuing in nominal terms we are likely to see policies that accommodate this approach.
Effectively what we have seen is the purchasing power of the dollar be destroyed such that assets continue to look the same in nominal terms while in reality their real values have dropped. This sort of debt monetization is the politically easy way out of a growing spiral of economic death caused by debt. The particularly nasty part of this is that it ruthlessly takes advantage of people who are only able to think in nominal terms, they see the "price" of their assets go up in nominal terms and pat themselves on the back for their investment acumen for getting consistent returns when in reality they have had no movement in wealth in real terms. If people recognized this for the intricate shell game it is they might think differently.
Housing the homeless
Given the great wealth countries like Australia have, housing those who are homeless due to affordability issues is something that is entirely possible. The events of 2020 have shown us that if the political will is there the entire homeless population can have a roof over their heads in a matter of weeks. In some senses I'm glad we can take some positives out of the events of this year because this shows housing the homeless isn't some impossible hypothetical, it's already been done. Because of the pandemic we saw all the homeless people in Melbourne have the opportunity to sleep under a roof. Even if it was due to fear and hysteria of a virus it shows it can be done.
I think a long term solution to the issue of homelessness must focus on making residential housing more affordable. The reason I've spent so much time talking about economics is that in the current political landscape we have a central planning of interest rates that has been kept rates artificially low which in turn makes leveraged real estate prices go up enormously. We also have policies like yield curve control in place that punishes people who wish to invest their money into other avenues outside real estate. We will always see a strong pressure for asset bubbles to form in the housing market when monetary and fiscal policy forces interest rates down and yields down while simultaneously creating arbitrary inflation targets that will be "met by any means possible". To enable people to have somewhere to live we will need to fight the formation of asset bubbles in residential housing. Fighting this sort of asset bubble I now believe is best done via having an economy that runs on sound money. The greatest driver of wealth inequality in decades has been monetary policy that's in turn created massive asset bubbles. One particularly painful manifestation of this is in the real estate market where being poor increasingly means you are locked out of any chance to be involved in real estate assets.
By first fixing the monetary policy we can start to fix the real estate bubble in residential housing. We can then remove the other regressive policies that are in place which force the average tax payer to foot the bill for providing access to the inflated housing market. Programs like the first home buyer grant would be far cheaper to fund, not to mention far more effective, if the residential housing market was not an asset bubble. Since a market that's not driven by economic distortions from artificially low centrally set interest rates will be far more affordable we can start to rectify the systematic problems that have caused the hard working people who contribute so much to out society to not be able to afford a place to live in.
Political policies that keep propping up the housing asset bubble also prop up homelessness via the reduction in affordability of housing. They also damage the broader economy in the process by redirecting wealth away from far more productive avenues. The next step is to repeal these regressive policies that force the tax paying base to pay for an asset bubble that is destroying the economy at the same time. Negative gearing in Australia is one of the most egregious cases that needs to be repealed. Globally we must reconsider the notion that interest rates can be set by any committee since this is a huge driver of many of the issues we now face.
We can deal with this situation, we just need to have the collective will to do so.