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Article – The rise in housing costs and its widespread consequences

Aníbal Linhares

Financial Markets

 Gonçalo Moutinho

Financial Markets

António Tunico

Financial Markets

Beatriz Pereira

Financial Markets

The price of buying or renting a house has been skyrocketing in developed countries in recent decades. Between 1994 and 2019, the average price of transacted houses in Portugal rose 228.3% after inflation, whereas the real wage only rose 26.3%, with other Western countries following a similar trend. This creates problems in economic, social, and demographic dimensions, thus we must find a solution to this crisis.

First, it is important to address which problems are worsened by the rising house prices. A pressing and most obvious issue is that higher-priced housing means a greater part of families’ budget is allocated to paying for their living space, resulting in the average portion of a Portuguese family’s consumer expenditure dedicated to housing increasing from 13% to 20% between 1995 and 2020. The problem becomes more serious when we consider that the most affected families are low-income households. This increase is even more remarkable if we consider that the interest rate in 1995 was higher than 11% and almost 0%, 25 years later.

Furthermore, this leads to a greater average age at which young people can leave their parents’ house, as it is becoming increasingly difficult for a young adult to accumulate enough liquidity to buy or even rent a house. In fact, in 2021, Portugal became the country where people leave their parents’ house at a later average age in the European Union. At 33.7 years old, this number holds a sizeable difference from the average of 28.1 years old that Portugal registered in 2000. The youth, without their own space, end up marrying later in life and consequently having fewer children. Moreover, the rise in housing costs associated with the space needed for accommodating an additional child may be a dissuader for potential future parents. These trends were observed in Portuguese society between 1995 and 2022: the average age for first marriages increased from 26.8 in men and 24.9 in women to 35.1 in men and 33.7 in women; the average age for women when giving birth to their first child jumped from 25.6 to 30.8; and the fertility rate fell from 1.47 to 1.338, far below the replacement rate of 2.1.

This data is worrying, as the demographic decline puts pressure on the social security system as the most numerous generations reach retirement age, calling into question the sustainability of the current model.

Upon recognizing the importance of inverting this trend, finding a solution to regulate house prices is fundamental. Some countries adopted rent control measures; however, the outcome wasn’t as expected. On January 30th, 2020 Berlin adopted the “Mietendeckel”, a law that defined rent ceilings according to the zone of the city and prohibited rent rises in the following 5 years.

 

On 15th April 2021, the law was considered unconstitutional and ceased taking effect, but, within its short timeframe of a little more than a year, it was found that the number of available houses for rent became less than half, and the landlords started demanding other forms of compensation for renting their houses, such as making the tenants pay for expensive furniture. In Stockholm, the average waiting time for a rent-controlled house is 9 years, with this number reaching 18 years depending on the zone of the city.

Another alternative to lower housing prices is increasing the supply, which means building more houses. However, when we consider that from a total of almost 6 million existing dwellings in Portugal, more than 700 hundred are vacant according to the 2021 Census – although these figures are subject to debate –, we can see that the effectiveness of this measure is geographically conditioned. As a matter of fact, the abundance of housing is pointless, unless they are built where people need them, near family, work, and services.

Studies suggest that people who live far from their workplaces, and consequently have long daily commutes, are more likely to exercise less, sleep less, and develop depression. It is essential for the general welfare that the need for these long daily commutes is reduced, something which can only be possible if more houses are built near workplaces. Since most of the population works in densely populated, large urban centres with few available spaces for construction, the only alternative is to build in height, an option that isn’t legal in various areas even though it offers certain benefits.

From a societal point of view, it’s much easier to guarantee the population’s access to services if cities are more densely populated. Plus, studies have concluded that people who live near parks and commercial establishments are less likely to be obese.

From an environmental point of view, the average carbon footprint per household in sparsely populated areas is much higher than in densely populated areas. A household that shares walls with other households tends to spend much less energy heating their homes, and families who live within a walkable distance of commercial establishments and leisure areas tend to use their cars less frequently. On top of that, the public parks usually encountered in those densely populated areas have more biodiversity than the private gardens commonly found in sparsely populated areas, as well as spending much less water per user, and even serving as a community meeting point.

The rising costs of construction, driven by soaring energy and raw material prices, make the current conjuncture less than ideal for building more houses, however, this is an urgent matter that demands prompt action in the next few years – there’s no time to wait for a perfect opportunity that may never come.

In conclusion, it’s hard to believe that one sole policy can simultaneously: mitigate the demographic decline and, consequently, postpone the collapse of social security, improve the physical and mental health of the population and make society more environmentally sustainable; but the truth is that there seems to exist a correlation between all those things. And the answer may be as simple as encouraging the construction of housing in areas where there’s a need for it.

Sources: PORDATA, ECB, Eurostat, Macrotrends, Foundation for Economic Education, BBC, ResearchGate, Financial Times

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