Property Prices Spike and How Government Can Help

You just turned 18 and your parents are all ready for you to move out just so they can get the retired life they always dreamed of. However, finding your first apartment and buying your first property has also been a worry not just for you but all first-time buyers all over the world. Before, it was already hard to save up for the down payment of that affordable apartment that you were aiming for, but now, it’s getting even harder due to market instability caused by the current COVID-19 pandemic outburst. Property prices are spiking again, especially among “affordable homes” showing the most growth in the industry.

The pandemic had cut down people’s spending, cancelled holiday trips, limited face-to-face socializing and reduced travel costs through home working. With more disposable income and interest rates at an all-time-low, investors take advantage of the situation to invest in these “affordable homes” to secure future investment profits. Similarly, other homeowners had also spent their disposable income in home improvements, real estate and renovations. Along with the media adding fuel to the fire – reporting the rapid rises of real estate prices, it is no wonder first-time buyers are in frantic panic, afraid of missing their chance.

Already missing their chance and anxious, these first-time buyers were accused as the reason for the recent price rises by the Property Investors’ Federation CEO with the reasoning that these youngsters are moving out of their flat to buy a home which led to the reduced housing stock. Shifting the blame onto the younger and poorer demographic is certainly unfair. These are buyers who are looking to settle down and start a family but are already largely locked out of the housing market due to the depredations of property investors and media.

The Issues with Housing Demand and Prices

House prices are not driven by production costs but driven by the residual values of existing houses. The scarcity of these existing houses drives the market value up – just like any commodity. Like Yin Yang, its abundance drives the values down. With investors and first-time buyers aiming for the same type of properties, this creates an artificial scarcity – which in turn drives the prices up. However, investors with greater financial ability than first-time buyers are almost certain to win this chase of real estate.

Then, the issue remained. With the increasing demand for housing, the government and developers have to come up with plans to rapidly generate enough housing to meet the demand, given build and construction is not a rapid process. However, in many countries – especially European countries, houses are mostly commissioned by individual customers – making each house unique and distinct. However, these types of development are standalone, large and of course, expensive houses. To build additional “emergency” housing stock, it will also take several years to be built.

Governments Are Builders Too

Looking at the issue, it is clear that moderation over the supply and demand of housing has to be taken as well as early construction of housing properties ahead of the market have to be implemented. However, many governments fail to understand that builders and developers will not do this without any benefits and external motivations. Those so-called “special housing areas” became a flop as the real estate market pushed for the increase of standalone and expensive sections, instead of high-density lands. Governments assumed developers would up-scale their productivity and production without external funding and contracts. Developers and builders have limited resources. Without guaranteed customers, starting large development contracts would be risky and that’s the exact reason why builders avoid taking on speculative builds. It would be naïve to simply compel builders to build more on their own accord.

What the government can do is to encourage and incentivize them with large contracts. The government can provide the development capital to get ahead of the market in order to become the customer of first resort.

Hungry Property Investors

With public funding to certain projects and developments, it will certainly trigger a bunch of hungry property investors which could cause an “unfair competition” from those not favored. For example, in Malaysia, high density places such as Mont Kiara attract lots of investors into affordable and great quality properties in the area such as Segambut apartment and Taman Desa condo. The demand side could be reduced through various methods to limit these investors and provide opportunities to poorer demographics such as: