Housing Can’t Be Both Affordable and a Good Investment (2018)
Housing affordability is part of a larger demographic&#x2F;economic problem - due to extended longevity and declining birth rates, many Western societies are facing a higher ratio of retirees to workers.<p>This is a problem because essentially all current consumption is created by current workers, and retirees aren&#x27;t working. The transfer from workers to retirees happens in one of two ways: either through taxation (&quot;Pay As You Go&quot; systems like Social Security), or in exchange for transferring a financial claim from retirees to workers. So as the retiree ratio increases, a combination of several things have to happen to balance the flows of goods and services:<p>1. Retiree consumption decreases.<p>2. Worker productivity goes up.<p>3. Taxes go up.<p>4. Workers spend more of their money on financial claims.<p>If you look at what happens when the first three are relatively fixed, what does the last one happening look like? The only household budget items big enough to swing the needle are things like paying back student loan debt, their rent or mortgage (basically equivalent here), 401k contributions and other retirement investments, and to a lesser extent automobile financing and other consumer debt.<p>Note that this is more like an energy-based physics analysis than a force-based ones - it illustrates the overall tradeoffs that have to get made somewhere, but doesn&#x27;t specify causal mechanisms. The actual causal path is something like the increase in saving pushing down interest rates, which makes financing desirable long-term goods (housing, education) more affordable on a monthly cash flow basis, which drives up prices until the market clears once more. In other words, college and housing became more expensive because the aging population needs to loan more money to the next generation to fund their retirement.<p>Also, the demographic that&#x27;s currently getting squeezed the hardest by all this isn&#x27;t Millennials. It&#x27;s middle-aged folks stuck in the awful gap of having aging parents and maturing children. After all, &quot;retiree consumption decreases&quot; is a really bland euphemism for what goes on at the ground level - retirees not having enough food to eat or being unable to afford medical care. And on the other end, it&#x27;s getting harder for children to afford to take the steps required to become independent, so this unfortunate demographic also has to set aside more housing and other resources for their children than before.<p>I really don&#x27;t have good ideas for any sort of practical action to resolve these tensions. It&#x27;s extraordinarily depressing. Personally, I&#x27;m expecting these trends to continue, and for this all to result in lower per-capita retiree consumption when I&#x27;m of the appropriate age, so I&#x27;m saving at a higher clip now to compensate. All this does is, though, is increase current retiree consumption and improve my rank-ordering in my retirement cohort; saving more doesn&#x27;t fix the problems my cohort will end up facing.