In recent years, a persistently critical question on the socio-economic landscape has been the issue of housing affordability. As house prices steadily ascend, the concern is no longer just about owning a home, but about the underlying factors driving these price hikes, their alignment with wages and demographic growth, and the comparative value of homes to traditional commodities such as gold and beef. Moreover, the impact of political decision-making adds an extra layer of complexity to the housing affordability narrative. Let’s take a comprehensive look at these variables to determine whether housing is indeed affordable.
As the housing situation could be different in countries, we look at the American market to discuss. The same analysis can then be done to draw relevance to whichever countries you may be reading this from.
Deciphering House Prices Through the Commodity Lens
House prices in the US have witnessed a marked increase since the 1970s. The U.S. Census Bureau indicates that the median price of houses sold in the country, which was approximately $25,000 in 1970, has surged to nearly $400,000 as of 2021.
That said, did the housing price really increased when it is compared to another item? This comparison of real estate prices to a commodity is so that you can understand the net impact of dollar devaluations. A piece of gold and a property essentially remained the same throughout the years but the dollar prices fluctuate due to demand and currency movements.
Interestingly, when juxtaposed with the price of gold, a different story unfolds. Gold, priced at around $35 per ounce in 1970, skyrocketed to about $1,800 per ounce by 2021. If we evaluate the cost of a house in terms of gold ounces, the median house required about 714 ounces in 1970, but only about 222 ounces in 2021. This suggests that while the dollar price of homes has risen, they have actually depreciated relative to gold. You can see the chart below (it goes back to pre-1900s) where in fact, housing prices are comparatively lower versus to gold.
A similar pattern emerges when we compare house prices to other commodities such as beef. The price per pound of beef was roughly $0.76 in 1970, but by 2021, it had escalated to nearly $6. Therefore, despite the nominal increase in house prices, they have remained relatively consistent when compared to certain commodities.
The Intersection of Demographics, Wages, and Housing Prices
Demographic changes and wage growth in the US provide another essential perspective to the housing affordability debate. The American population has undergone significant shifts over the last five decades, including growing diversity and aging, both of which significantly influence housing demand and consequently, prices.
That said, the US population is plateauing. Generally, if the population is increasing, there will be more demand for housing. It should cause a downward pressure on prices.
However, the trajectory of wage growth paints a less optimistic picture. Data from the U.S. Bureau of Labor Statistics indicates that the real average hourly earnings only grew by approximately 12% from 1973 to 2018, a stark contrast to the productivity growth of 77% over the same period. This widening gap between wage growth and rising living expenses, including housing, has posed a major obstacle to housing affordability.
This does also paint to the above point where housing affordability could be due to other factors besides pure price increases.
Politics and Housing Prices
The political arena plays a crucial role in shaping housing prices. Tax laws, interest rates, housing policies, and even international trade agreements can significantly sway the cost and demand for housing.
The 2017 Tax Cuts and Jobs Act, for instance, capped the amount of mortgage interest that can be deducted from federal taxes, potentially making homeownership more costly for some buyers. Conversely, low interest rates can make mortgages more affordable and spur demand, although these rates are often the result of political decisions or economic downturns.
Is Housing Really Affordable?
Given this data, is housing in the United States truly affordable? The answer is complex and largely depends on the economic lens through which one chooses to view it.
When compared to commodities such as gold and beef, housing prices have remained relatively stable. However, the glaring disparity between wage growth and housing prices cannot be ignored. As wages have stagnated, the cost of housing has continued its upward march, placing homeownership out of reach for many.
This is further compounded by political decisions that may either mitigate or exacerbate these challenges. Low interest rates may bring temporary relief, but tax laws could offset these benefits.
The issue of housing affordability in the United States is multifaceted, encompassing economic, political, and societal variables. While housing prices may appear affordable when compared to commodities like gold or beef, this perspective is challenged by stagnant wage growth, demographic changes, and the impact of political policies.
Therefore, asserting that housing in the United States is universally affordable would be an oversimplification of the complex dynamics at play. The reality is that affordability is relative, dependent on individual circumstances, and affected by broader economic and political trends.
Addressing the affordability conundrum necessitates a multifaceted approach that not only stimulates wage growth in line with housing prices, but also explores innovative housing policies and takes into account the profound influence of political decisions on the housing landscape.
So what does this mean for you, as an individual?
Our take is that generally you should still purchase your house at an affordable price. This can be measured against a few ratios such as your mortgage payments to your income, purchase price to your annual income. Overpaying for a house which is beyond your financial capabilities is often a huge setback to your journey towards financial freedom, given that a mortgage often last at least 25 years.
What other takeaways do you have from your home country and how did this article helped you think further? Love to hear your comments.