Rising home prices have contributed to increased wealth inequality. The rapid urbanisation during the last few decades has created severe problems of housing in cities. As demand continues to rise and the supply of affordable housing remains a challenge for the government, the price of existing units has greatly increased, leading to inequality in wealth generation. Owning a house can significantly contribute to the level of wealth an individual will accumulate over their lifetime.
The rising inflation of real estate prices has helped shine a spotlight on broader issues related to housing affordability, wealth inequality, and inclusive economic growth. The upward creep of home prices relative to income levels in markets has convinced policy-makers to put measures in place to ease the financial pain for potential buyers. Real estate property must be recognized as an important means for people from all backgrounds to potentially gain wealth. Wealth based on the value of real estate assets increases at a faster rate than income based on other sources. This trend combined with existing housing policies has created a dynamic where only people with access to family wealth have been able to invest in the property market as high prices increasingly limit access for the general public. In China, the country’s wealth inequality increased by more than a third between 2002 and 2012 due to rapidly rising real estate prices (World Bank, 2013). The collapse of housing prices has also shown a drastic reduction in the wealth of middle-income families and investments inequities have been shown to give the highest boost to wealth (Moritz Kuhn, 2018). Therefore, it is important to understand the implications of housing affordability on the wealth of citizens.
In this blog, the Iqbal Institute of Policy Studies explains the relation between the problem of affordable housing and how it impacts wealth.
The Problem of Affordable Housing
Housing affordability is a growing crisis for urban areas with constrained housing markets. Due to a high rate of urbanisation in many cities of Pakistan, there is a sharp increase in demand for housing. Coupled with a low supply of housing units, the rising prices of housing has led many to remain restricted to slum dwellings and also contributed towards rising poverty. Housing plays a pivotal role in the economic development of a country by contributing to GDP, employment creation, growth, and enhancing social standards. On one hand, urbanisation has the potential to open up economic avenues for development and at the same time, urbanisation can also perpetuate socio-economic inequalities and conflicts. Unplanned population growth and excessive rural to urban migration are the two primary factors that are responsible for Pakistan’s unmanageable urbanisation. Looking at the average fertility rates in Pakistan, the population could increase from 210 million to 380 million by 2050 (United Nations, 2016). As cities become hubs of economic activity in an era of industrialisation, many Pakistani’s livings in rural areas also migrate to urban centres in search of better livelihoods.
Impact of Rising House Prices on Wealth Generation
Housing markets have been gaining a lot of attention. Concerns related to supply lead discussions, particularly at the higher segment of the market. Many studies have demonstrated the impacts of house markets on the economy through the investment effect. The increase in house price attracts real estate investment as a result of capital gain expectations. Investments in housing can increase the GDP in the short run, however, an overheated investment may lead to an unbalanced economic structure. Housing supply and affordability play a large role in creating differences in housing markets and labour markets across urban areas. A house is both a shelter and an asset. Homeowners invest a large portion of their savings in housing which ultimately leads to an increase in wealth as house prices rise. But this also means that those who cannot invest in real estate are pushed further back in the equality spectrum. As real estate is a major source of wealth generation and multiplication, increased prices over time mean that a certain segment of the society who have the means to invest in real estate will ultimately become wealthier over time. This will lead to greater inequality in societies and reduce the efficiency and rate of economic development.
Rapid urbanisation and increased rural to urban migration are placing stress on the housing market. Increased demand and low supply of affordable housing have meant that more and more people from the lower- and middle-income segment are unable to buy pieces of land or complete housing units. As the rising cost of land pushes more people out of the investment spectrum, inequality becomes inevitable. To counter this situation, regulatory authorities must control speculation in the market and form policies that aid and facilitate the provision of affordable housing to the masses. Not only will this allow the market to stabilize its rates, but it will also enable economic growth and prosperity for all sections of society.