Housing shortages and money gluts: Analyzing housing affordability as a monetary problem

Europe, the US, China, and many other societies experience severe housing affordability crises. A consensus developed that high prices reflect a housing shortage due to insufficient housing construction in response to rising demand. It is assumed that in a well-working market, the solution to rising house prices, shortages and affordability problems is a supply response, increasing housing construction. This may be obstructed by regulations. Solutions to the crisis are therefore sought in removing regulatory barriers to building more houses.

  What is missing in this analysis is the notion that the market economy is monetized. The supply of housing may not be the main cause nor the principal solution in an affordability crisis.

  A housing shortage is an imbalance between money available to access housing (income, saving and borrowing) and the money needed for access (purchase prices and rents). This is a monetary problem of a shortfall in purchasing power relative to house prices. This may or may not indicate a shortfall in housing units. In fact, housing shortages are not observed as too few physical housing units, but as the number of people who would like to start their own household, but cannot obtain a home. Even with a stable housing stock, the housing shortage increases if more prospective buyers or tenants are confronting too high ask prices. And too high prices may result from money inflows chasing the existing housing stock, not necessarily from insufficient construction.

 Housing shortages may be caused by money inflows into the housing market from banks, professional investors, and wealthy individuals (e.g. parents). Reasons for the inflows include low interest rates, easy borrowing norms, investor-friendly policies, generational wealth transfers, low returns in other asset classes, and fiscal advantages – not necessarily too little construction.

 I am open to research collaborations and/or grant writing to research the housing affordability crisis from a financial and monetary viewpoint.

The attached paper is one example of my research in this area.