In this initial post in an occasional series, let’s look at the housing crisis in two distinct countries: America (capitalist) and Spain (socialist). The similarities and differences in the nature of the challenge are useful in describing what policies might work. And the word might is important there, because housing is a so-called wicked problem.
The term “wicked problems” was first coined by by design theorists Horst Rittel and Melvin M. Webber in their 1973 paper “Dilemmas in a General Theory of Planning.” Simple problems are like those in mathematics or engineering (i.e., “How do we build a bridge?”) which have relatively straightforward solutions. Wicked problems, as the name implies, are very different: they are difficult to define, are never totally solved, and involve multiple factors (beyond the obvious) which complicate the solution. Housing might sound like a simple problem, since people have been building houses since civilization began. But having the right housing for the population’s current needs? That’s a wicked problem.
The United States story
Prior to World War II, renting was the prevalent form of living arrangement in the US. After the war, policies like the GI Bill, VA mortgages, and federal infrastructure spending (the interstate highway system) changed everything. Home ownership went from the exception to the rule quickly, within two decades. The concept for the American suburb, with a detached home, large yard, garage, and an essential car became the standard. The homes were small: often less than 1500 sq.ft., considered starter homes (then and now). There was ample supply and demand. The federal government and both political parties saw home ownership as a civic good, giving people sustained roots in their community, even if people tended to move between areas.
Meanwhile, the US population underwent a population surge we now know as the “baby boom.” This created a positive cycle of housing demand which lasted into the 1980s, despite recession and economic problems. Even though interest rates spiked into the teens in the 1980s, still roughly 40% of the new housing stock was starter homes, meaning the boomers could still afford to buy into the process, but perhaps further out of town or in less desirable neighborhoods.
Interest rates continued to decline across the 1990s and 2000s, eventually as low as two percent during the pandemic. Decades of low interest mortgage loans fueled up-sizing, as signified by the production of “McMansions.” Boomers could sell their existing house at a profit and roll over that money into a larger home in a more desirable location. Meanwhile, US population growth was slowing, eventually stalling with the exception of immigration (more on that later).
At the same time, local governments began to squeeze property development. Some governments made special assessments, in effect charging the builders for the right to even create their products (i.e., houses) on the theory that more houses meant more people and therefore more roads, more schools, more police, etc. Localities pushed to limit suburban sprawl because it replaced natural settings and produced “soul-less suburbs.” Wealthy residents in large cities used zoning rules and strategic lawfare to keep “undesirable developments” (like affordable housing) out of their neighborhood.
The low interest rates, up-sizing, and NIMBY opposition combined to send a new market signal: build fewer, larger houses. This was only logical from the builder’s standpoint: if every new development is going to be a protracted legal battle, and there is steady demand at the most expensive end of the market, do you build one-thousand houses priced at $100,000 each, or one-hundred houses costing $1,000,000 each? The rate of production of starter homes fell from the postwar 40% to only 24% by 1990, then collapsed altogether, hitting only 7% today! Meanwhile, the US immigrant population (legal and otherwise) went from approximately 3 million in 1985 to over 16 million today. And what type of home is sought by the overwhelming majority of immigrants? Starter homes. And while many boomers were up-sizing, there are some who like having a fully paid-off, small home in the same place they grew up or worked, so some of the existing stock of starter homes is occupied by aging boomers for whom they are right-sized and from which they have no desire to move.
As starter homes grew scarce while demand remained steady, the rest of the housing market exploded, but not everywhere. Certain large cities and dynamic areas (think Silicon Valley) experienced explosive price increases, while many small towns or rural areas became practically value-less. I recall South Bend, Indiana, as a great place to grow up in the 1960s, but when I visited family there in the 1990s, I was shocked to realize that what I paid for townhouse in Alexandria, Virginia, could purchase either a mansion or an entire block in South Bend! In addition to a general lack of starter homes, we also have a geographic mismatch: the homes we have aren’t where the people want to live.
No one planned all this. The government did promote home ownership, perhaps too much. You might recall the 2008 finanicial crisis sparked by outrageous housing speculation caused by federal policy: as the old trope goes, you knew we were in trouble when you heard your hair stylist discussing “flipping houses!” But that isn’t the cause of the current predicament. Neither is private equity, which owns only a tiny percentage of homes. Rather, supply and demand are out of whack both in size and location, and interest rates have started rising from unnatural lows. If you need to buy-in above the starter house level and interest rates are high, your down payment (not to mention PITI) is going to be outrageous.
And so it is.
La historia española
Spain is also experiencing a housing crisis, although it got there via a very different way. After World War II, Spain was governed by dictator Generalissimo Francisco Franco, who largely kept Spain out of the global economy. Spain’s economy was moribund until the 1970s when democracy returned. And Spain’s population stopped growing and started graying long ago. There was one major similarity with the US: Spain already had a culture which emphasized home ownership, where almost 75% of Spaniards own their home or apartment (compared to 66% in the US, which is also a high level).
Spain has an even more serious problem with its domestic building capability: the entire home-building industry collapsed during the 2008 financial crisis, and almost all of the younger workers abandoned the field. In the years since, the older workers have retired, and the net capability to build anything has plummeted. In this, Spain represents one possible future for the US, as they are further into the “graying” phenomenon the US is only beginning to experience. Meanwhile, Spain experienced an even more dramatic population shift from the towns and farms to the cities. Large swaths of the country (“Empty Spain”) have nearly deserted towns–with many empty or vacant homes–while cities do not have the apartments they require for the arriving population.
Three things exacerbate this situation. First, the Socialist government sees immigration as a solution to Spain’s demographic shortfall, and has welcomed or legalized millions of immigrants, who need to live and work in the cities, not in the empty villages. Second, Spain’s high quality/low cost of life has sparked an investment boom by expats and tourists, who again want to live in the vibrant beach towns and cities, not the dilapidated villages. Almost one-fifth of home purchases in Spain last year were by foreigners. Third, rent-control laws and other forms of government regulation (like mortgage qualification requirements) restrict home or apartment supply and demand where it is most needed.
Much is made in the press about the expat angle of Spain’s housing shortage, but forgoten in the political posturing is this: the vast majority of Spain’s homes are owned by Spaniards, so why aren’t they leasing to the many Spaniards who need them? Because it’s economically wiser under the current system to not do so. If your apartment or home is vacant, it may attract squatters and years of litigation to evict. If you rent it to a local, you may be unable to raise the rent or ever evict them for non-payment. But if you rent it via AirBnB, you prevent squatting, avoid rent protections, and possibly evade taxes. Guess which option Spanish owners choose? If the government focussed on this point, or why the villages are empty, or why the construction industry is moribund, it would make more sense.
Imagining solutions
Nothing will quickly solve Spain’s or America’s housing crisis. Both developed over decades due to profound demographic, economic, and political forces and choices. Both have entrenched cultural aspects. At its root, policies must address the quantitative and geographic mismatches between supply and demand. You increase the number of starter houses or apartments, and you try to induce a movement in the demand to areas where the supply is adequate.
But there are policies which we know will make the problem worse. For example, rent-controls have an unblemished record of making the situation worse. Laws defending squatters call into question the very concept of ownership, and argue against the owners ever renting out. The same goes for laws which make rental contracts almost inviolable on behalf of the renters. They do nothing but further limit the growth of the rental market. Likewise, trying to limit where people want to live is a fool’s errand. If America’s urban elites can’t ever imagine the “despair” of living in suburbia, that’s ok, millions more Americans love it, and policy should support it.
The lack of sufficient home/apartment-building capacity is a major challenge in both countries. While immigration could play a role, first the national governments should examine why the building trades–traditionally a path to a comfortable middle-class life–are being abandoned by native populations. Youth unemployment is above twenty percent in Spain, almost nine percent in America. Perhaps in the short-term a guest worker program can help, especially if structured specifically to the building trades. Yet the need for building trades workers should never be used as an excuse to permit or countenance illegal immigration. Few things are more corrosive to nations which espouse the rule of law than to premise the entry into the country by illegal means as a necessary evil to be tolerated.
But more important is to pursue policies which incentivize the industry and local governments to recreate this career path for citizens. How about federal monetary incentives (raising employee pay-rates) for builders who participate in an apprenticeship effort aimed at the unemployed? With the money being targeted at states/localities that loosen building regulations, sidestep NIMBYs, and set aside other anti-growth policies? The commitment by state and local government to reduce regulations is critical here: there are cities and towns which have demonstrated that friendlier regulatory regimes result in large increases in safe, affordable, and environmentally-sound apartment and home construction, and other places which demonstrate how a lack of regulatory release leads to stagnation. There is no credible argument about this point.
I am not sanguine in the near term about the housing problem. Democratic leaders in cities have proven resistant to taking on their elite friends and increasing home and apartment availability. Republican leaders looked the other way at illegal immigration’s role in construction, at least until Trump took office, and still resist any new federal programs, even if they will spur growth. Likewise in Spain, the focus seems to be on preventing foreign home purchases, which only nibbles at the corner of the problem.
In the long term, of course, demographic changes will resolve the issue. With each succeeding generation being smaller than those preceding, the overall balance of housing supply and demand will be restored, although the geographic balance (cities versus towns) will take longer. Then the problem will become how to handle the vacant stock and resulting empty neighborhoods. As with all wicked problems, they’re never totally solved.