Affordable Housing Institute : US

Like many European countries, the British pride themselves on preserving greenfield, and shudder to think of American ’sprawl,’ but at what price in higher housing costs? 

 

A big one:

 

In late 2003, a three-bedroom flat in Hackney, a developing area of East London, [cost] about $447,000.

 

(Remember, that’s before the dollar began its recent slide against the pound.)

 

 

Jack Bowley was tired of paying rent each month with nothing to show for it and wanted to buy a home in London, where he works.  But given how swiftly prices were rising, and how much of a down payment he would need for a mortgage, he couldn’t reach even the first rung of the property ladder.

 

Because housing demand is elastic, high house prices inhibit household formation:

 

So he teamed up with the two friends he was renting an apartment with.

“I couldn’t even have afforded a studio apartment in central London by myself,” said Bowley, 26, a media analyst. “But working together as close friends, we were able to do much better.  If we hadn’t known each other so well, such a joint mortgage could be hazardous.”

 

Overheated housing markets in some European countries and some areas of the United States are leaving many first-time buyers in a similar predicament.

 

Despite generally low interest rates, young professionals often have to borrow money from relatives for down payments …

 

In the US, one is typically required to certify that no part of the down payment is borrowed from anyone, because lenders have learned that over-levers the borrower and risks default.

 

… risk interest-only mortgages and 100 percent financing, or think creatively as Bowley did — team up with friends for joint mortgages, which often are adjustable-rate loans.

 

Part of this is the weak dollar, but some of it is long-term structural:

 

In Britain, though, the government’s National Savings and Investments department said that while wages have increased nationwide by an average of 79 percent in the last 10 years, house prices have gone up by 180 percent.

 

Thus a buyer paying 30% of income in 1994 would today be paying half again as much in 2004, as the foregoing little table shows:

 

			Percent
	1994	2004	increase
Income	50,000	89,500	79%
Cost	15,000	42,000	180%
Ratio	30%	47%

 

For their higher prices, do the Europeans get more space?  As anyone who’s ever visited a semi-detached knows, they do not.  Here’s another remarkable statistic, from a recent EU-USA study (download here, .pdf):

 

The average living space for poor American households is 1,200 square feet.  In Europe, the average space for all households, not just the poor, is 1,000 square feet.

 

By the way, sky-high prices per square foot (or meter) are not unique to London.  Take Dublin:

 

In Dublin, the average price of a residential property is now about $451,000.

 

Even allowing for a strong Euro/ weak dollar contrast, that’s way above US levels, and it’s inhibiting new household formation (and with it, labor mobility):

 

Retired bank manager Dennis Raftery said he and his wife, both in their late fifties, are still sharing their home with their two youngest children, who are in the twenties.  “They’ll never be able to afford their own property in Dublin,” Raftery said. “They’ll just have to inherit our home once we’re in the ground.”

 

High home prices also slow the birth rate:

 

Some young couples are delaying parenthood so both partners can keep their jobs to afford the mortgage payments, and in France, Spain and Britain the average age of first-time buyers is rising.  It rose to 34 from 31 in Britain from 1991 to 2004.

 

Declining birth rates contribute to a graying of the population and projected population decline:

 

Europe
Population (thousands)
Medium variant
1995-2020

 

Year	Population
1995	727 885
2000	728 463
2005	728 389
2010	725 786
2015	721 111
2020	714 959

 

High home prices put stress on transportation:

 

Public sector workers, such as nurses and police officers, often can’t afford to live anywhere near where they work.

 

Which is why politicians such as London Mayor Ken Livingstone and Chancellor Gordon Brown are promoting ‘key worker’ housing (quote from Brown): 

 

And because affordable housing is the key to personal prosperity for millions, John Prescott and I will implement the barker review with new plans to bring homes within the reach of first time buyers, including expanding affordable housing for key workers in our public services.

 

Housing is influencing public policy:

 

The British government is trying other initiatives aimed at helping more people become first-time buyers. Loosening its strict planning rules for constructing new homes, the government is offering surplus public land for inexpensive starter homes, and making it easier for private companies to build thousands of dwellings in areas of southern England where many people live and commute to London.

 

The consequences are felt not just in homeownership, but also in rental.  In the US, ‘affordable’ rents mean 30% of income, including utilities (often by the landlord).  In the UK, ‘affordable’ means 35% of income, excluding utilities.

 

How much of this is due to infatuation with greenspace?  When I drive through central Ohio, or even Greenfield, Massachusetts, and see forests or vast farmlands, I do wonder:

 

What price greenfield?

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