A basic promise when buying a home in a major economy is that its value will rise over time, essentially it’s an asset that provides security and self-determination through potential growth. However, the issue arises when the barriers to buying get exponentially higher.

Housing is a key contributor to economic growth due to the wealth effect, a behavioural economic theory. It suggests that people spend more as the value of their assets (such as the price of their house) increases even if their fixed costs remain the same. This is beneficial to an economy because it results in higher economic growth as consumer confidence rises which promotes the consumption of goods and services.

Real estate is also the most dominant type of asset for the middle class in terms of wealth composition in most countries.

In 2017, American economist Edward Wolff found that 61.9% of middle class gross assets came from their principal residence (an individual’s primary home). This high percentage amplifies the wealth effect theory since the middle class make up the majority of the US economy

Why is it so difficult to buy a home in the US right now?

The United States is facing a housing market crisis, stemming from the gap between median income wages and the increase in the cost of housing. Additionally, the housing supply shortage is worsening the situation.

According to the US Census Federal Reserve Economic Data in 2022, median income was $74,580 compared to $479,500 of home prices (a staggering six times the average American income), in contrast to data in 1972 which showed that median income was $9,697 with home prices at $29,200 (three times their income).

This shows that there is a major gap between income and house prices whereby consumers now have to save much more to purchase a home.

The other reason behind elevated prices is the housing supply shortage. According to official data, the US homeowner vacancy rate (the percentage of homes that are for sale) in 2023 was the lowest (at -0.25%) since 1956.

Restrictive zoning laws, governing factors like location and building density, have resulted in a decline in home construction, reducing the overall availability of homes for purchase.

But not everything is gloom and doom: Morgan Stanley’s chief economist, Ellen Zentner, forecasts housing affordability improvement in the US by 2024. According to the expert, the inventory will grow alongside homebuilding activity, which will offset an increase in demand.

China’s housing accommodation battle spans 30 years

In the 2000s, China initiated an enormous construction boom with the fundamental belief that property prices could only go up. The boom was further amplified as a result of the substantial rise in urbanisation and privatisation of property.

Following it, the housing crisis arose especially when buyers started speculating over the potential price increase – they were seeking to invest and turn it into profit, rather than living in the houses they bought.

Real estate developers stalled construction of many pre-sold properties as they did not have enough cash flow to finish construction. This resulted in a decline of consumer spending and investment falling, which heavily impacted the oversupply of housing which strained investors and developers.

Over time, this has resulted in smaller companies struggling and eventually even the biggest construction developer in China, Evergrande, declared default in late 2021.

Oxford Economics lead economist Louise Loo predicts that China’s big property market problem will take at least 4 to 6 years to resolve.

“Seismic shift” in the UK housing

The UK is experiencing low affordability in its housing market because of rising demand and diminishing supply. Similarly to the US, incomes have not kept pace with the rise of house prices.

In 2021, the average cost of a house was 65 times higher than in 1970, while earnings have only gone up 35 times. The average UK house price was £287,782 in October 2023.

Earlier this year, Hasting Borough Council’s Labour leader, Paul Barnett, told The Guardian: “The financial difficulties that we are facing are a result of national housing crisis. The system is broken, and as a result is forcing many of our residents out of secure accommodation into temporary housing provided by the council.”

Authorities attribute a “seismic shift” in housing affordability as a result of several factors – demographic change, long-term erosion of social housing and housing benefit levels, failure to build sufficient new homes, and the defunding of local authorities.

Andrew Baggot, Conservative leader of Basildon Borough Council Essex, said that radical solutions were needed such as long-term government investment in social housing and regulation of the private rented sector. But, Savills, a real estate agency, predict that prices will start to bottom out in 2024 due to the fall in interest rates and return to growth in 2025.

Speaking to The Guardian, Lucian Cook, its head of residential research, declared that “the growth is expected to accelerate as affordability pressure eases, with the strongest growth forecast for 2027 when rates reach their long-term neutral level.”

How will a housing crisis impact us?