House Price Inflation & The Widening Wealth Gap

Steve Saretsky -

The cost of housing has become a hot button topic across the world, but of course that is not a surprise to anyone. As home prices inflate well beyond wages, affordability is being eroded, particularly in global cities. This has simply been exacerbated through monetary policy, where a decade of cheap credit has funnelled into assets such as housing, enriching those with access to capital.

This is the inevitable side effect of keeping rates too low for too long. Creating a crisis between the haves and the have nots, as hedge fund billionaire Ray Dalio has noted in his research, this is “the issue of our time.” Since 1980, median household real incomes have been nearly flat, and the average household in the top 40% earns four times more than the average household in the bottom 60%. Further, those in the top 40% now have on average 10 times as much wealth as those in the bottom 60%. That is up from six times as much in 1980.

A recent article in the Wall Street Journal echoed these thoughts, suggesting the bottom half of Americans haven’t recovered from the housing bust. “The share of families in the bottom half who own a home has fallen to about 37% in 2016, the latest year for which data are available, from 43% in 2007.” Household net worth in the bottom 50% has not recovered.

The report also highlights the growing phenomenon of US home builders targeting the luxury market. Something which i’ve also seen here in Vancouver. “Builders have focused on higher-end homes for those with good credit and high incomes. As a result, affordable homes have become scarcer and more expensive. Between 2011 and 2017, the inflation-adjusted price of a starter home rose 56%, according to CoreLogic, a data provider. Real median incomes increased 12%, according to the Census.”

However, make no mistake, this is not just a US problem. It is a global epidemic. Australia is grappling with a housing bubble, one that has been blown so large that an entire generation could be left behind. This is something Australia’s Central Bank chief, Philip Lowe, recently acknowledge as his primary concern.

In a candid interview with The Sydney Morning Herald, Lowe noted “Eventually a house gets passed to kids or grandkids, and gets passed down at high prices,” he says. “What if you come from a family that’s renting, or where the house price is not particularly high – they will find it much more difficult.”

However, despite these issues interest rates are poised to remain near zero as Central Banks fear the alternatives looks a lot worse. This of course poses the risk of continued home price inflation, however Governments are now being forced to lean against the inflationary boost of home prices with more aggressive policy actions.

As a result we have more populism, more political friction, and more policies aimed at re-distributing wealth. One needs to look no further than here in BC, the NDP Government and their policies are merely a symptom of the underlying disease. Imagine if home prices continue to rise unabated, widening social cohesion, what types of action will Government be forced to take then?

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The Saretsky Report. December 2022