Written and fact-checked by financial expert
Lloyd
You’ve probably heard that the world is in the midst of a global housing crisis. You may have noticed it yourself, if you’ve been in the market for a new home, or even just a rental. Houses are in short supply, while prices are sky high, and the cost of borrowing is through the roof. How many “it’s really high” analogies can we possibly burn through to say that housing is getting expensive?
Yes, it’s a Housing Crisis
While the specifics of the situation will be different in every country, every state, and almost every city, the general picture around much of the world is the same. This is indeed a housing crisis, and it’s only getting worse.
This post is going to be about understanding the crisis: what forces are driving it, and maybe what some of the answers will be. As in everything this complex, there is no single cause to this problem. However, as you will read, there are essentially 4 major factors which are strongly contributing to the crisis, and their complexity and interconnectedness make any solution difficult practically, politically, and economically.
Those factors are: global supply chain shortages, changing demographics, financial economy instability, and climate change. While there are other factors that do matter, especially in specific areas and around specific types of housing, those are the 4 factors driving the global crisis. Therefore those are the 4 areas we will focus on in this post, so that you gain a more general understanding of the challenges we face.
So let’s get started:
Global Supply Chain
It’s virtually impossible to talk about a global phenomenon like the current housing crisis by starting with one root cause. All the root causes work to reinforce each other. That’s why you’ll find that even as we go through root causes, each one will connect with and play off the others.
So we’ll just start with one of the easiest among the causes to understand: the global supply chain is in trouble. Since at least early 2020, it has simply been harder for builders, governments, and individual homeowners to procure building materials.
It would be reductive to say that this disruption in the global supply chain is because of COVID-19. In the short term, COVID is the culprit for disruptions in the supply chain, all the way from the initial production of building materials, to the processing, transportation, delivery, and use of those materials. The fact is that over the past nearly 3 years, over 600m people have become sick, nearly 7m people have died, and many millions more have been partially or even permanently disabled by the virus.
This sudden loss of a workforce, from one end of the supply chain to the other, has had catastrophic consequences to the global economy. And those disruptions are only made worse; much, much worse, by the prevalence of global “just-in-time” supply chains.
The Achilles Heal of Globalism: Just-in-Time
The global economy has produced more wealth than the world has ever seen. Today you can buy cheap products produced almost anywhere in the world, delivered to your door in a day, or less. That doesn’t only go for you: that goes for manufacturers as well. More and more of the global supply chain runs on what is known as “just-in-time” logistics.
That system requires a complex interconnected system of supply and delivery, where the world’s transportation infrastructure constantly moves goods from one place to another at just the moment when those goods will be used. Today, if you shop at Walmart, buying one single product can initiate a change in the global supply chain, all the way from the store, to the delivery infrastructure, up to the manufacturer, and all the way back to the raw materials. Every single time you buy something today, the global supply chain reacts.
What this means practically is that, unlike a century ago, if you’re running a car plant in the UK and you need a steady supply of “widgets” (for our purposes, a widget is just “a random thing”) to make your cars, instead of buying a million widgets and storing them in a warehouse nearby, you contract with a widget supplier, possibly in another state or country, and that supplier sends you the exact number of widgets you need every single day.
Not only does that supplier send you only the exact number of widgets you need, but it may also only produce exactly the right amount of widgets to supply you and everyone else who buys them.
The advantages of a system like that is that you and every other car maker no longer have to have their own widget warehouse nearby. You also no longer have to order a million widgets at at a time, and compete with every other maker also buying widgets from the same supplier, driving prices up. No storage and no pre-ordering mean that you can be more efficient.
Or imagine you run a book shop. In the days before just-in-time delivery, you would have to order books by the hundreds for your orders to be economical. That meant that you were likely to run out of certain books faster than others, and you couldn’t be quick to respond to changes in demand. just-in-time ensures that even a local book shop can get a copy of your favorite book in no time at all, and always have one available, without having to order hundreds of copies and risk all of those sitting in the warehouse for months or years.
That allows businesses to operate more efficiently and cheaply, and that means cheaper prices for consumers, along with more choice. But there’s a dark side to this marvel of efficiency: if it stops running, even for a single day, the consequences can be quite severe. As magical as just-in-time delivery can seem to be, when it breaks down, it breaks down hard.
Just-in-time Becomes Just Waiting
It’s not hard to imagine what happens when a global system like this starts to break down. If I’m a building supply company and I have just-in-time delivery, then all I have to do is put in my order for new cement and new bricks on friday, and by monday I have everything I need waiting for me at the job site.
But suppose the delivery company has a problem with one of their trucks. The digital control unit broke down, and the company needs a new one for the truck to function. No problem, right? Wrong. That part has to be sourced from a just-in-time supplier 300km away. But oops, they didn’t get their shipment of control units from Taiwan because the factory got shut down. Potentially that means that suddenly every single delivery truck that uses that control unit can’t be fixed or replaced.
So maybe I have to wait a few days to get my cement and bricks and such. No big deal right? Ah, but now my jackhammer has malfunctioned. It needs a new bit. But that bit is supplied by just-in-time logistics from another country. Suddenly instead of getting it the same day, it will take 6 weeks to get a new one – and that assumes that the just-in-time delivery of parts to that supplier also doesn’t suffer a missing part.
Problems On Top of Problems
If the maker of my tools can’t buy computer chips to put in their factory machines, they can’t make the tools I need to build. Everything suddenly is waiting on a little microchip from Taiwan, or a piece of specialized carbon fiber from Germany, or a fuse from Japan.
Since late 2019, there has been a perpetual “backing up” of that supply chain, as one thing or another breaks down, the time it takes for the whole system to supply parts to the rest of the system gets longer, and the longer it gets, the more stuff breaks down, until eventually it seems like nothing works.
So if I’m making a house, not only can I not buy tools to build with, I can’t buy the materials either, because the factory that makes those materials is waiting for parts too. And as they wait for parts, the mine that digs up the steel to make the parts is also waiting for parts. The whole system is waiting for other parts of the system to catch up to itself. The whole global supply chain is playing a game of “guess who’s missing” every day, with seemingly no end in sight.
Unknotting The Supply Chain
The supply chain is snarled in a horrible mess that seems impossible to fix. Still, there are solutions. One of those is to simplify. Over the past few years, manufacturers such as carmakers have been reducing the number of control units and microchips their cars require to operate, in hopes of being able to produce enough cars to meet demand.
Another option is to simply lower your expectations. Consumers can no longer hope to get graphics cards in 2 days or less. Cars are now on back-order for months, or even years. And of course, prices go up because those who really need those products most are willing to pay more to get them.
This global supply chain disruption is driving inflation, as consumers become willing to pay more not to have to wait, and everyone on the supply chain has to raise their prices to be able to afford parts that are suddenly rare. It’s estimated that at least half of the current price inflation is driven by corporations raising prices in anticipation of future disruptions to the supply chain. As companies become less confident that they will be able to make things in the future, they raise prices today to offset the future loss of business.
With inflation rising and supply chains tight, one of the inevitable outcomes is that fewer homes are getting made. Not only is it harder to get materials, but it’s now harder to afford those homes because prices are rising. Buyers are between a rock and a hard place: unable to buy what’s not available to sell.
Demographics Are Changing
We said all these phenomena are interconnected. They are, even when those connections are hard to untangle and make sense of. Another factor in the current global housing shortage is changing demographics.
For this discussion, it’s useful to split the world up into what is basically several different housing markets with different demographic challenges. There are two main challenges facing different parts of the world today: populations are aging, and populations are growing.
The “First World” is Graying
An aging population is not usually a big problem for the housing market. In fact, if you have a good balance of new buyers entering the market as elderly home owners sell out or pass away, it’s easier for younger buyers to get homes to replace the elderly.
It wouldn’t seem to be such a big problem if society has fewer young people looking to buy homes, and more elderly people looking to sell their homes. But in western countries, the population is greying, meaning that while we have continually more and more elderly people, those elderly people are not dying at the rate that we would have expected in the past.
Higher standards of living and better health care is allowing people to live longer lives. So unlike generations past, many people are living into their 80s and 90s, and consequently occupying their homes for much longer. To add to this phenomenon, the “baby boomer” (those born between 1946 and 1964) population that is currently retiring or has already retired is among the richest ever in history, as well as one of the largest. The unprecedented economic growth of the west after WW2 coincided perfectly with their lives, giving them, as a group, probably the greatest generational wealth the world will ever see.
The boomers are a generation that were largely able to buy homes and pay off the mortgages on their homes long ago, and now their comfortable lifestyle is seeing them continue to benefit from home ownership, while younger generations have fewer homes available to buy – and those at much higher relative prices. Baby boomers continue to benefit from the shortage of new homes by seeing their home equity (the money they would have if they sold or remortaged their homes) continue to grow long, long after they came to own those homes.
The outcome has been essentially a massive transfer of wealth from the younger generation to the elderly, particularly in places such as the United States, the UK, Australia, Japan, and Western Europe. As the young continue to have to compete to buy homes, the elderly see their wealth grow far larger and faster than they could have ever anticipated, and this in turn makes them unfriendly to the idea of creating more affordable housing for younger generations – seeing as new building would reduce the value of the homes already built.
Demographics are Destiny
The elderly, however, will not live forever. This trend may continue for a while longer, but eventually the baby boomer generation will pass away. In addition, as younger generations gain in political power, the tendency for home owners to fight the addition of more housing units in their towns and cities may subside. Climate change will make suburban living more and more unaffordable, and as western nations continue to urbanize, it’s likely that much more high-density housing will be added.
When the baby boomer generation is no longer the largest and richest in history, it’s inevitable that this trend will drop off – but the ecological and economic damage that their wealth is beginning to cause systemically is something that will last much longer.
The Developing World is Booming – But It Won’t Last
The other trend that is happening at the same moment in developing economies is a very rapid rise in the population, particularly of working age people. Whereas just a few decades ago, countries such as India, Algeria, Nigeria, Pakistan, Malaysia and Brazil had record birth rates, today those birth rates are falling rapidly. What is left is a population that is heavily skewed to working age people, and with them comes an enormous need for new housing so that they may start having families and building generational wealth.
The problem is that a lack of affordable housing in those countries is retarding birth rates even further, as people continually delay having children because family housing is unaffordable. This growing pressure in those regions to create new housing is feeding the already dangerous housing crisis.
Worse yet, as those populations begin to age, there will likely be a “population bust,” in which fewer young people will be around to replace the elderly population. That spells future misery for hundreds of millions of people, as those societies run out of working age populations to care for the elderly. This will also have long term consequences for the west, as demographers anticipate lower than expected immigration from the developing world, meaning that there will be fewer workers available in the future, and less cheap labor available globally.
The lack of housing, energy, and affordable food and health care in those regions is also having enormous negative pressure on the birth rates – which are dropping faster than many economists predicted they would. Again, climate change jumps out as a major driver for this change. Ecological devastation, floods, and fires are making these regions more vulnerable to famine and instability.
A few decades ago, it was believed that the developing world would continue to grow until the global population reached over 11bn people by 2050. Some economists predicted as much as 13bn by the end of the 21st century. Today, demographers predict that the global population will reach only 9.7bn by 2050, and peak at just 10.4bn in the 2080s, before falling dramatically thereafter.
The estimates are dropping because of the economic challenges the developing world faces today, and that sudden drop in birth rates will have consequences for the stability of the world economy in the coming century, even though the lower overall global population will no doubt be a positive, if we can succeed in containing global climate change.
Financial Shocks
As has become clear, all of these phenomena are linked. Their interconnectedness could not be clearer when looking at the situation of international finances in 2022.
We know that global supply chain shortages and growing populations create pressure on limited resources. That pressure is partially relieved by a decrease in consumption and a simplification of the global supply chain. Companies are making products with fewer microchips. Builders are making houses with fewer materials. Everyone is trying to reduce their usage of expensive materials, and on top of that, the world is fighting global climate change, caused by that very supply chain and the consumption that goes with it.
Another vector for instability then is in the global financial markets. As commodities such as oil, gas, water, and metals become harder to source, harder to transport, and in more demand from a growing population, prices go up. As we’ve discussed before, after nearly 40 years of relatively stable prices and wages, there has been a sudden explosion in consumer price inflation. Wages have also jumped sharply for the first time in a generation.
It might not sound so bad to imagine that prices of materials are going up, if wages are going up at the same time. That should make it easier for working people to keep up with price increases, while retired people have to make do with their existing pensions and social security payments. However there is almost nothing that governments fear more than core inflation rising out of control.
That’s why global prime interest rates (the interest rate the government is willing to pay banks to save money) are higher than they have been in decades. As you can see in the data from Freddie Mac, the US Government’s prime interest lender, housing loan interest rates are the highest they’ve been since the housing crisis of 2008, when the US government took extraordinary measures to push rates down to save the housing market.
These sudden rises in rates particularly hurt younger working age borrowers, who have no choice but to borrow at the higher rates in order to purchase homes, and are facing much higher monthly mortgage payments than they would have had just a few years ago. Those who borrowed when the rates were lower, such as many retired people did during the historic lows of the 2010s, are now paying a rate far lower than inflation, only adding to the problem of burgeoning wealth inequality between the rich and working class.
Governments Focused on Inflation
The housing crisis would be bad enough even if governments in developed countries were focused on meeting the rising demand for housing, but unfortunately they are not. Governments fear inflation more than almost any other economic problem, because inflation reduces the government’s ability to dictate monetary policy and control the economy.
As we discussed in previous posts, inflation is a danger to long-term planning and economic health, which is why governments will do almost anything to stop it. This can go as far as price and capital controls (forcing people to keep their money in banks and not allowing certain prices to rise), or it can involve significant rises in interest rates to slow down spending and keep prices from rising.
What that means for the developed world is that for now, controlling inflation is going to be seen as more important than solving the housing crisis. In order to solve the crisis, the government would need to loosen borrowing rules and encourage banks to lend money and developers to invest in housing. However, if they do, core inflation will inevitably keep rising. Therefore governments will most likely focus on getting inflation under control, and new home buyers will suffer through continued shortages.
That means housing prices have no way to go down by much in the near future. They may not rise much for a long time, but it’s unlikely they will drop by much, or for long. In time, housing prices will adjust to the new reality, and it’s probable that prices in the future will more closely reflect the actual ability of new buyers to afford borrowing. But that can’t happen quickly if there isn’t a lot of new housing being built. Scarcity feeds demand.
What this hurts most of all, however, is new home builds. With higher prices of materials, higher costs of labor, and higher costs of borrowing, it’s simply less profitable for building companies to build new housing. That places even more pressure on the cost of already built homes, and transfers yet more wealth from the young to the aged who already own their homes.
It’s probable that while working age people will continue to benefit from rises in wages, the lack of affordable housing and the cost of borrowing are going to be a long-term challenge for many workers who wish to own their own homes. And a lack of homes means pressure on younger people who wish to start families, creating a future host of problems as the population continues to age.
Climate Change
It seems to practically go without saying that all of the problems we’ve discussed so far are worsened by a changing climate.
Climate change is affecting global supply chains in every way imaginable. Forest fires and floods reduce the availability of wood and freshwater, which impacts the prices of everything from paper, to structural lumber, to the costs of food packaging and more. As droughts worsen, the amount of arable land is reduced, and it gets harder to grow crops on land that has been devastated by drought or flood.
Rising temperatures impact the yield of crops, and droughts reduce the productivity of farms. Colder winters affect the availability of fruits and vegetables, and as fewer are available, the already stretched global supply chain makes this problem worse – as in many cases the whole world is competing now to buy limited quantities of important food stuffs.
Climate change also increases the demand for energy: heating in the cold, and air conditioning in the summer, which means less energy and resources available for farmers. A lack of fuel makes farming more expensive, and lack of cheap oil affects the production of things like fertilizers and other chemical agents. Without aggressive management of the soil using fertilizers and pesticides, soils become less productive, and more pressure is put on those areas where the soil is still healthy.
Solutions: People Rise to the Challenge
It’s important always to keep some perspective on these problems. The picture we’re painting here is not pleasant. But if there’s anything that is true in human history, it’s that people are resilient. As the cost of food and other resources increase, our ingenuity will be put to the test. People’s habits will change. Companies will learn to conserve more, and governments will look to new investments in technology and new ways of living.
Recent history has been driven by a great deal of confidence in the idea of the future. Solutions, indeed “solutionism” itself has been the ethos of the past century. Those solutions most often take the form of new technologies and new gadgets, but the challenges of the future are different. With diminishing resources and reductions in the complexity of the global economy, we have to look to human, social, and philosophical solutions to our problems. The future may not depend on a new technology. Instead it may depend on you and me: working better together to build our communities.
New Urbanism
The shortage of housing is going to encourage people to seek more affordable (and more sustainable) ways of living together. This will probably take shape in the adoption of new urbanist ideas, including more mixed density housing, more mass public transit, more sustainable housing, and more sustainable sources of energy.
This will be driven not just by environmentalism, but by necessity. People will have to change their lifestyles, and technology will have to advance. Less travel and more online meetings and shopping. Less tourism and more local exploration. Less driving and more biking. Less eating out and more cooking at home.
Does all of that sound so bad, really?
Smaller and Smarter Economics
The endless economic growth of the 20th century may be largely behind us. But does this mean that life cannot be better in the future? No.
Endless economic growth, as we have seen, has made certain individuals and even whole countries richer than we could have ever imagined, but it has also impoverished the Earth. The future of economics might not be “more and better,” it might be “smaller and smarter.” We may come to better value our time, to view progress on a human scale, rather than an industrial one, and we may realize that our future depends on us preserving what is most important to us: our planet, our communities, and ourselves.
Supply Chain Simplification
The global supply chain will also adjust. Individuals and businesses will get used to buying less sophisticated devices, for one thing. Do you need a computer chip that’s powerful enough to run a satellite in your hot water kettle? Probably not. Do you need a new smartphone with 11 new cameras next year? Probably not.
We will have to get used to simpler products, and fewer updates, less often. This may even be a blessing in disguise. Think what life could be like without every device in your home recording data about you, tracking everything you do, all the time. Does your light bulb need to be connected to the internet? Do you even want it to be?
Supply chain simplification means less choice, but it also means more local flavor. Perhaps micro-farming will become popular, which will provide the ability for locals to still find exotic fruits and vegetables, but sourced locally, powered locally, with the local economy benefiting from it. Without global supply chains competing against local businesses, perhaps our communities can be stronger and richer by working more closely together, rather than all of us scrambling for products made half a world away.
In sum: a future of “less” does not mean a bad future. In some ways less could be more. Less could be better for us, and better for our communities. Less could be the best thing for us.