Bloomberg News/Landov
Consider a trendy city, beloved by tourists and home to a thriving economy and plenty of industry. Its housing market is starting to feel a bit strained. As an academic who grew up there put it, “Prices here began to take off and within a few years were growing at annual rates of over 15%,” after the housing crisis bottomed out.
Sound familiar?
No, it’s not San Francisco — nor is it New York, or even Austin, Texas.
“A similar story can be told about other large cities in the Netherlands,” writes Klaas Knot, the hometown boy, in a recent paper. “And more recently the rest of the country has followed this trend, albeit at a slower pace, which means that house prices are now rising everywhere,” he added.
Knot isn’t just any Amsterdam native. He’s also president of the Dutch central bank, De Nederlandsche Bank, which last summer organized an international seminar on the twin challenges faced by the developed world’s big cities: rising housing prices and falling housing supply.
As Knot noted in the foreword to a paper about the seminar: “Strong price increases are making urban housing affordability a pressing issue everywhere in the world. For central bankers, who are mainly responsible for financial stability, affordability may not always be the most important concern. However, extreme examples show this can become a problem for broader economic well-being.”
Read: America’s housing market is competitive, unequal, and often just getting by. Just like us.
“Cities are becoming more and more popular all over the world, leading to a surge in demand for urban housing,” Knot and several co-authors write. That’s because they “have become the economic powerhouses” of their countries.
In a 2017 story, MarketWatch cited an economist who commented that the 15 biggest metro areas in the U.S. account for more than half of the national GDP.
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That activity — not just jobs and education, but also what the researchers place under the “cultural events, creativity, recreational opportunities and of course the presence of other people” umbrella — lures people, which reinforces the attraction for people of similar backgrounds. (That’s not just well-educated and mobile young people, by the way. It also describes recent immigrants.) By 2100, academics estimate, 80% to 90% of the population will live in cities.
Another insight: It isn’t just people streaming into cities — capital is flowing in that direction, too. Housing is in demand as an “investment good,” not just for shelter. Importantly, investors can be foreign as well as domestic. That means that “house prices in the cities thus not only reflect the local factors such as supply constraints, regulations and zoning, but also global trends.”
Those “local factors” present another key takeaway, though. All real estate is indeed local, and, when space is scarce, any additional restriction on how it can be developed and used makes it a lot pricier. Importantly, Knot and his co-authors point out that this impacts not just purchase prices but also rental costs. Either way, middle-income households around the world are struggling to afford housing.
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And urban price growth leads that of the rest of the country: “[W]hereas house prices in the major cities are soaring, the housing market in the regions surrounding these cities is now gaining strong momentum as well,” the “Hot Property” authors write.
Now back to the question of why a central banker should care. As the De Nederlandsche bankers say, “in some countries, the house-price boom is accompanied by booming lending, but not everywhere.”
In Australia, for instance, households are becoming more leveraged, even as investors are increasingly piling into the market. “Macroprudential” policies, such as capping the loan-to-value ratios on the mortgages banks make, “definitely have an impact, but are insufficient on their own.” Those policies are intended to keep banks — and borrowers — less leveraged.
That’s because so much of the housing problem is, as noted, local and because it’s rooted in low supply. Central bankers can’t do much about local zoning laws or residential builders who want fatter margins; they can only help increase or decrease demand, whether through lending rules or interest rates.
Read: Four years, $13 million and dozens of hands: How ‘affordable housing’ gets made in America
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