I zoned out in my land economics exam in late June 2022. The question asked me to explore the effect of government intervention in housing and housing allocation. So far, the exam had not inspired an epiphany (side tracking) and I was well on my way to securing my distinction. Alas, my mind favours academic liberation at the cost of academic success. 2022’s feared housing crash had some hallmarks from the 2008 housing collapse, once this crossed my mind, I knew a pass would be a comfort come August results day. Property development has so many tangents!!
I have been trying to block out exam traumas but since that particular epiphany decided to invade my dreams, I have no options left. So, in the form of characters in a blog post, I am damning it forever.
When the Federal Reserve in the United States set out to stimulate spending in 2020, most saw this as a positive agenda. The Reserve went on ahead to give out the now numerous stimulus checks and reduced the lending rates to historic lows. The effect however was not as pronounced as the theoretical argument set it out to be. The vibecession followed, a self-fulfilling prophecy?
Well for one the stimulus cheques did help the average American survive the lockdowns; I will not have a negative interest in this area. It’s the lending rate and its trickle-down consequences that got to me, particularly in my area of concern, property. The theoretical argument for reducing lending rates is that businesses and individuals taking up these loans will encourage investment in productive activities, this is backed up by the encouragement of spending. Spending then rolls up into further encouragement for productive investment. This is where the nail lies.
The predecessor
Let’s step on it, shall we? When Federal Reserve does reduce lending rates, correlated mortgage rates also drop, making it easier to buy property and stimulating demand in the market. The increase in housing affordability causes investors and well-placed individuals to speculate on increased demand to buy property. It’s almost a guarantee that demand ticks up as the public has the sentiment that a house is crucially important and is an investment. The latter is debatable if one does not intend to play in the market.
Housing stock is usually in the redder zones. There’s always some latent demand that if activated will outstrip supply. A win for speculators as they know that supply lag is akin to Africa’s political rise, they again buy any new stock injected into the market. Feeding into the stock shortage and further raising prices. A loop that’s only broken by the price of family homes being incredibly unaffordable, cue your housing crash.
The Problem with property investment
The issue with this sort of property loop commonly lies in affordability and if rental prices also take the up from house prices the trickle-down effect raises prices in the macro plane. What I mean by this is the increase in house prices may very well contribute to inflation. Still, my problem is not there.
My issue is with how houses are classified as productive assets. Sure, they may very well be assets for the ease in which they can acquire debt capital but that’s very much it. Unless you’re renting out your house or leveraging it in some ways, your house is a cost. On the macro, a house does not have any output that categorises it as a productive asset. The property loop raises the levels of inequity in the economy due to the affordability issue.
Even in an investor’s portfolio, houses do not have a productive output that other asset investments have. They simply yield monetary returns in exchange for maintenance activities. For most households, buying a house actually ties up more capital that could otherwise be spent on other consumer products to stimulate their respective industries. Housing simply doesn’t produce export earnings, knowledge-economy jobs and innovation that any country needs.
How it’s supposed to be
Housing investment helps make better provisions for the right to shelter/housing but not provisions for productivity. So, the reality of the situation is that if the government seeks to improve a country’s export potential or simply encourage economic growth from production. They should stifle the rate at which residential properties receive investments. This is in favour of initiatives that provide jobs, have incentives for innovation and can be capitalised for the export market.
As property prices are fed largely through the encouragement loop. Not meaning to forget the fundamentals of demand and supply. Governments should admit that residential property investments are, firstly, an asset class that effectively holds investment hostage in return for ROI that pays dividends after a span. The dividends of which are in monetary terms alone. The scenario self-perpetuates as the asset holds qualities that make it a safer investment option at the cost of productive potential. This means that profits obtained from housing rentals or housing sales are likely to be reinvested into housing.
Secondly, it should be understood that investment stimulation in property looks for the outcome to be new property development. New developments take a lot of time to set up and for allowed spending to be fed into the economy from developer wallets. This may contradict the window period in which the investment effects are supposed to manifest in the economy. All the while existing properties become the main playing ground for the freshly injected capital.
To keep it short
Residential property investment is fine when looking towards providing shelter and making profits in whatever form. Property investment during an economic downturn should however, not be encouraged comprehensively as the activity will only hold up capital, leaving out investments that have better productive returns in the short and medium term. New development tax breaks and subsidies should be the focus of encouragement if spending in the economy is to be encouraged for its trickle down or multiplication effect.
Now, I hope that’s that and that because I’ve laid out my thought process around this, I can finally rest. If you have any contributions to this post, contradictions too, please don’t hesitate to comment. For my other blog posts, please click here.
