Why Is Housing So Expensive? The 7 Root Causes Explained

When you attempted to purchase a house or rent an apartment in virtually any major city within the past ten years, you have probably felt like your stomach had been sunk as you skimmed through the listings or signed a lease that is gobbling your entire paycheck. Affordability of housing has become one of the crises of our epoch- Los Angeles to London, Sydney to Stockholm, the price of a dwelling has been rising faster than incomes at an alarming pace.

The statistics are painful: in the United States, the median home price has more than 40 percent increased since 2020, and rent is increased by almost 30 percent in the same time. Housing affordability in Canada has been so depleted that the generation rent is a common term used in the vocabulary.

Protests against the skyrocketing housing prices have been observed throughout Europe with cities such as Lisbon, Dublin and Berlin witnessing it. The frustrating aspect of this crisis is that it is so very simple: a house is a human need, a necessity, but nowadays, it is one of the most costly spending categories in family budgets.

The reality of the matter is that the unaffordability crisis cannot be attributed to one cause. Rather, a perfect storm has been swirling together a set of structural forces, some decades old, and has come together. These underlying causes have to be known not only by people who have difficulties paying rent but also by voters, policymakers, and people who think that stable housing should be within the reach of average citizens.

Limiting Zoning and Land-Use

The main culprit of the housing affordability crisis is a tangled network of zoning laws and land-use regulations, which amount to criminalizing the building of new houses. Well into the 20 th century, American and European cities were constructed and permitted a mixture of housing types to be developed on a dense basis.

However, beginning in the postwar period, single-family zoning, that is, allowing only detached houses and they are located on large parcels, became popular in enormous areas of urban land. In urban areas, such as San Francisco, Los Angeles or Seattle, the residential zoning of areas is primarily composed of single-family housing, and it is unlawful to construct anything other than apartment buildings, townhouses or even relatively small duplexes in neighborhoods where employment and facilities are agglomerated..

There is more to single-family zoning, an alphabet soup of rules and regulations restrict supply: minimum lot sizes, setback rules, height restrictions, parking requirements, historic preservation overlay, and more. Parking requirements are especially venomous: most cities require two parking spaces per new unit of apartments, which increases construction costs of the apartments by $50,000 to $100,000 per unit and makes infill development financially infeasible in many cases.

The environmental review processes are well-intended, but they have been used by the opponents of new housing to put off projects over years. In California, the California Environmental Quality Act (CEQA) has been exploited over the years by the neighborhood groups to sue proposed developments, which incurs millions of legal fees and interest charges, which are eventually transferred to the tenants. The net sum total of these restrictions is that the construction of new housing has been turned into a crawl, an unpredictable, and monumentally costly undertaking.

The Financialization of Housing

In the last forty years, Housing became more of a financial commodity, a place to live has become more of a commodity, which can be bought, sold, and monetized. This has been so significantly changed by financialization, which, in other words, has changed the operation of the housing markets.

Single-family homes and apartment buildings are now considered by institutional investors, private equity firms and real estate investment trusts (REITs) as a means of earning returns, with many purchasing thousands of properties within the same metropolitan region. After the financial crisis of 2008, Wall Street companies such as Blackstone bought hundreds of thousands of foreclosed houses and transformed them into rental portfolios. These corporate landlords are today able to coordinate rent increases in whole cities using algorithmic pricing software at the expense of tenants.

Financialization has had many impacts which go way beyond corporate ownership. Housing has turned out to be a popular investment among the rich in cities of the world as they park their capital in vacant luxury apartments and this has resulted in supply being low in the area due to the large number of vacant units. Vancouver, London and New York have witnessed complete luxury towers remain dark as the problem of homelessness continues to rise.

The billions of dollars that international investment, often based on jurisdictions with weak transparency systems, has invested in prime urban real estate have been used as safe-deposit boxes instead of shelter. In the meantime, tens of thousands of units have been taken off the long-term rental market by the expansion of short-term vacation rentals via applications such as Airbnb. In a 2023 study, it was established that the rent in cities with high Airbnb satisfaction grew by an estimated 7-10 percent more than in other cases.

Soaring Construction and Land prices

Assuming the removal of all the zoning restrictions to-morrow, it would still be costly to construct new homes due to the raw costs. In the areas where the land is highly sought after especially in the urban centers, land prices have taken astronomical heights to the order of 2040 percent of a project.

There are towns such as San Francisco where a small piece of land to build a small apartment house can fetch millions even before one shilling of concrete is poured. Restrictive zoning is a cause of this inflation of land-values, in its turn, since when there is little developable land, the price will be low due to the lack of it. Even in the construction side, costs have only continued to increase.

The price of lumber, steel, concrete, and other building materials had been subject to wild swings due to the pandemic and now is at 30-50% of higher levels than before the pandemic. This is caused by supply chain disruptions, imported material tariffs and worldwide commodity demands.

Another significant item is labor costs. The supply of skilled construction workers has been low in most parts of the developed world and it can be found that the problem dates back to the 2008 financial crisis where the construction industry lost millions of workers who never came back. The graying of the construction labour force, the mean age of construction worker is now 40s, and the scarcity of youth to join trades has created a chronic shortage of labour that has led to higher wages and longer construction projects.

Further, there has been an increased cost and risk-aversion in construction finance. Developers have had to take loans at high rates of interest and lenders are demanding more and more as a presale or commitment of equity before they release the money. Such financing expenses involve carrying charges that may cost over 100,000 per month on large projects which end up in end rents or sales prices.

Ongoing Insufficiency in Building and inadequate Supply-Demand

It is probably the simplest justification to high housing costs: for decades most high growth cities have not been able to construct an adequate supply of homes to match the rate of population and job creation. The extent of this underbuilding is phenomenal. California as an example constructed less than 100,000 average new homes per year since 2010 and its population increased to more than two million people.

The housing department of the state alone estimates the number of new homes that must be constructed in California is at least 2.5 million by 2030 to fill its own shortfall, a rate that it has never maintained. In the same way the United Kingdom constructs less houses nowadays when compared with the 1970s when there were many more people living in the country.

The result is what economists refer to as a housing deficit a structural unmet demand between the amount of homes required and the amount of homes offered. In cases of inelastic supply to satisfy the demand, the prices increase until the market clears, forcing lower-income households out, leaving only those who can afford the increasing costs.

What makes the situation even worse is that the supply of houses is extremely inelastic in short-term; despite the sharp increase in demand, it requires years to allow, finance, and create new buildings. This delay implies that when there is a high rate of economic growth or when there is in-migration, the prices may soar before the supply finally catches up. However, in most cities, supply will never be equalized since the political and regulatory mechanisms tend to oppose any new development.

Rent-Seeking Behaviour of Landlords and Algorithmic Pricing

In addition to structural supply limitations, the state of housing markets is becoming more and more that of rent-seeking which drives the prices above what would be determined solely by supply and demand. Large landlords are now able to align pricing more precisely than ever before due to the large scale adoption of revenue management software, the most notable of which is RealPage YieldStar. These applications have proprietary algorithms that examine rival rents, occupancy rates and market circumstances and advise the best rent levels to improve revenues. Although this may be presented as neutral tools, in reality, they promote price coordination between the competitors and, in effect, they displace competitive pricing with centralized rent-setting.

This has been increased by the concentration of ownership of rental housing. In most of the metropolitan regions, the rental market has become dominated by a few corporate landlords. In Atlanta, the institutional investors hold about 30 percent of the total single family rental houses making them have a high level of market power.

These companies use advanced data analytics in determining rent and tend to organize via common platforms. In the meantime, smaller landlords are becoming more and more dependent on the same algorithm, thinking that they need to stay on top of the market. The outcome is that the market acts not so much like a competitive market place but as a tacit collusive oligopoly. Increases in rent that would have been inconceivable ten years ago, a percentage increase in rent of over ten percent in one year, are the order of the day in most cities. Antitrust regulators have taken notice of this behavior, the U.S. Department of Justice has sued RealPage and other large landlords, yet the behavior is widespread.

Demographic Changes and the Dynamics of the Households

Demographic factors have been in the long run working silently to transform the housing demand in a manner that increases the burden on affordability. The largest among them is the fall in the average household size. The average American household of 1970 had 3.14 people, which currently has reduced to around 2.5 people.

This implies we will require a lot more housing units with the same population. The causes are varied: individuals are marrying later in life, divorce rates have been high, lifespan has been rising (generating single-person households of elders) and more adults opt to live alone. All these trends make households in more numbers, even when population growth declines. Even more radical changes have been witnessed in Europe and Japan whereby, ageing and decreases in the birth rate have resulted in an increase in the number of single person households that demand housing units irrespective of the total population.

There has also been increased demand in the large cities due to urbanization patterns. Over decades, the young people and educated workers have been crowding into cities and putting demand pressure in places where supply of houses is most restricted. The knowledge economy and its emphasis on face to face interaction and the agglomeration effects has turned such cities as San Francisco, New York, London, and Toronto into magnets in terms of talent around the world. Meanwhile, the suburban and rural regions have experienced a stagnant or falling populations, and this has led to the lack of housing where people wish to reside, and the inability to construct housing in those same areas.

This geographic concentration of demand connects to a supply system that is usually most limiting specifically in urban cores of high demand. Besides, remote work has brought about a new dynamic where some cities have experienced out-migration, but several attractive smaller cities and suburbs have also experienced their own housing cost boom with high income remote workers bidding up prices.

Conclusion

Housing has gone costly not due to the existence of a single villain or easy reason, but the culmination of profound structural forces that accrue across the generations. Zoning which can be considered as restrictive has made our cities exclusive and no new homes can be built on large plots of land. Financialization has turned shelter into a speculative good, which pits the interests of investors and scarcity.

The cost of construction and land has gone extremely high to a point where new housing is expensive to construct. Underbuilding over the past decades has resulted in a shortage in supply which will require years to repair. Record profits have been ripped off by renters by the use of algorithmic pricing and corporate landlord consolidation. Demographic changes have essentially changed the way in which most households require to be housed and at where. And the government policies with well-intentioned policies have resulted in the distortion of taxes and incentives that make the same problems they are intended to correct.

These root causes are the origin of solutions, and this is the first step to meaningful solutions. When one of the key causes is restrictive zoning, then land-use regulations should be reformed in order to permit more housing. In case financialization is stealing value out of renters, there should be increased antitrust regulations and protection of tenants. In case construction costs are prohibitive, then governments need to consider modular construction, public development, and simplified permitting. When speculation is preferred over stability by the tax policies, then the mortgage interest deduction and property tax structure should be on the agenda.

A housing crisis cannot be resolved by any one policy, however, an all-inclusive strategy that combats all the seven underlying causal factors can help start turning the tide. Finally, housing is so fundamental that it cannot be left to the mercies of market forces that were more concerned with profits and not with human beings.

The fundamental project of our time is to reclaim human rights and public goods, not as a commodity but as a human right, and a human good. The crisis has not manifested itself in a single day and it is not to be resolved in a single day but by identifying the cause of the problem in a straightforward manner, we are in a position to insist in the kind of changes that are so necessary in the system.

Also Read: AFFORDABLE HOUSING FUND