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Affordable housing crisis spreads throughout world

The Wall Street Journal. logo The Wall Street Journal. 8/21/2019 Laura Kusisto, Peter Grant
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Cities around the world, from New York to London to Stockholm to Sydney, are struggling to solve growing affordable housing crises.

Acute shortages are persisting despite millions of dollars invested and hundreds of thousands of units built. Some countries have focused on solutions promoting unshackled free markets while others have turned more to rent control and subsidies.

But no approach has solved the crises and most have other negative ripple effects.

Across 32 major cities around the world, real home prices on average grew 24% over the last five years, while average real income grew by only 8% over the same period, according to Knight Frank, a London-based real-estate consulting firm.

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Economists say it is striking that affordability has worsened even during a period of global prosperity over the last six years. But income growth has been unable to keep pace with a rapid run-up in home prices.

Inflation-adjusted home-price gains have outpaced income growth over the last five years in 18 out of 25 world cities in the Knight Frank report. In two other places—Dubai and São Paulo—real incomes have fallen more than home prices, creating similar challenges.

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Migration patterns have been partly to blame. Cities have thrived over the last decade, as jobs and people have migrated back downtown from far-flung suburbs.

“Global cities are suffering from affordability issues, partially as a result of their own success,” said Liam Bailey, global head of research at Knight Frank.

Soaring prices are also being fuelled by increasing demand from investors.

These have included domestic “mum-and-pop” investors buying second homes and foreign investors taking advantage of new technologies and an increasingly globalised financial system.

Governments haven’t had the money to subsidise new supply. Most budgets are strained by an ageing population with growing pension and health-care needs.

The private sector has also fallen short.

In numerous hard hit cities, developers have built hundreds of thousands of units but most of them are priced at upscale buyers and renters, not the middle and working class people who are being priced out of the market.

Tokyo is one of the few cities in which supply has kept up with demand, keeping a crisis from developing. But that is due largely to deregulated housing policies that other countries would have a hard time reproducing.

“It goes against the notion of planning and developing cities in an orderly fashion,” said Laurence Troy, research fellow at the City Futures Research Centre of the University of New South Wales, Australia.

To keep a lid on prices, governments in some countries, including Canada and Australia, have added taxes aimed at curbing purchases by investors or foreigners.

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Buying by Chinese investors, who have been particularly active during most of the decade, has declined because of recent capital controls in that country.

These trends, coupled with a glut of luxury supply, have damped prices in some of the frothiest markets. 

In Sydney, the median house price at the end of last year was about $1.1 million Australian dollars (£643,000), down about 11.3% from the peak hit in 2017, according to CBRE Group Inc.

A few years ago, prices in Vancouver and Toronto were growing by up to 30% annually.

But today they’re virtually flat, thanks in part to a steep sales tax aimed at foreign buyers and tightened rules to make it more difficult for families to qualify for mortgages.

“Basically what we are doing now is we are undoing crazy years,” said Benjamin Tal, deputy chief economist at CIBC World Markets Inc.

Still, while these markets have cooled, prices are unaffordable to middle-class families. In Sydney, they’re still about 12 times the median income, compared with eight to 10 in markets where prices are considered more affordable.

“When you’ve gone up 90% and you come down 10%, you’re still up 80%,” said Bradley Speers, head of research for CBRE’s Australia business.

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The public and private sectors are searching for new solutions. Cities such as London and New York have rezoned swaths of land to allow for more high-rise construction or relaxed rules to allow for smaller unit sizes.

Architecture and construction firms are trying out new construction techniques made possible by advances in technology.

For example, UK architecture firm Rogers Stirk Harbour + Partners is looking at ways to expand to the suburbs the modular construction techniques it pioneered with its pilot Y:Cube development.

“A lot of the neighbours looked at these and asked where they could get one in their backyard for their parents,” said Ivan Harbour, senior partner with the firm.

Meanwhile, housing is becoming an increasingly charged political issue, with proposals to expand rent control cropping up in places such as California, Germany and London.

Affordable housing has also become a big issue in the coming Australian election, with the Labor Party advocating measures intended to boost new supply and reduce speculation. 

Opponents of these measures warn that they could send the softening market further into a tailspin.

In Sweden, Stefan Löfven was able to eke out reelection as prime minister earlier this year but only after agreeing to numerous policies of other parties including one involving deregulating rents for tenants in newly constructed buildings, to encourage new supply. But many don’t expect any action soon because the government coalition is tenuous.

“Given the government we have in place, it unfortunately looks like it could be another four years without anything really happening,” said Albin Sandberg, an analyst with Kepler Cheuvreux, a financial-services firm.

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