It’s many people’s dreams to become a house owner someday but with an extraordinary rise in the housing market comes the daunting reality that many may not be able to afford a house.
In this article, we’ll explain what makes houses so expensive.
Table of Contents
Are houses always this expensive?
Well, no. Even taking inflation into account, the price we’re paying for an average house now is much higher than what people were paying a few decades ago.
In the 1950s, the median price of a home in the US cost $7,400. The median household income at the time was $2,900/year. This gives us a 2.55 ratio of home price and income.
That 2,900/year is overwhelmingly earned by a single salary. This was at a time when most women were stay-at-home moms and men were the breadwinners for the family.
Today, the median price of a home in the US is nearly $500,000 while the average household income is $67,000 (both husband and wife’s income combined). That’s a 7.46 ratio of home price and income, up from 2.55 in the 1950s.
Today, people have no choice but to buy houses that are nearly 8 times their annual household income compared to the 2.55 we’ve seen in the 50s.
1. Low-interest rate
The mortgage rate has been steadily declining since the 1980s.
With a lower mortgage rate, more people are able to purchase a home and with more people competing for homes, the prices of course go up.
Keeping your money in the bank would depreciate your money over time due to inflation.
The way inflation would impact your purchasing power is through the number of items you could get with the same amount of money over time.
For instance, say you have $100. You could use the same $100 to get 100 cups of coffee this year but the same amount of money ($100) could maybe only afford you 80 cups of coffee next year as each cup of coffee becomes more expensive.
This kind of phenomenon happens to all kinds of things (ex. Gas, milk, eggs, clothes, house, etc).
Your purchasing power drops as inflation rise. You need to spend more money to acquire the same amount of items over time.
This is why your money appears to depreciate in value if you keep it in the bank. To solve this issue, many opt to keep their money in properties.
For the past several years, home value on average in my city has gone up by more than 10% year after year. In certain pockets of the city, it’s even more at nearly 20%.
The overall trend of property value for the past few decades in most places of the US has been up as well.
As long as your mortgage rate is less than the annual value rise of your house, you’re still making money and you’d be able to unlock that money when you sell your house in the future.
You’d essentially be making money by living in your house and paying your due mortgage bills every month rather than keeping your money in the bank.
Keep in mind, that this is not financial advice there are other factors to consider before buying a property.
In some cases, you’d actually save more money by renting than by buying a house. A property can also depreciate in value as well, which is another factor to consider.
Click here to read the blog post on should you buy or should you rent a house. There’s a very simple formula to help you figure it out.
During the pandemic, the economy slowed down as everything closed down. To encourage spending, governments all around the world dropped the interest rate which combined with the work-from-home freedom encouraged even more buyers to get into the housing market.
With more buyers in the housing market, the competition became even fiercer. As one buyer outbids another, the prices inflate further.
Banks are rising the interest rate again which offers a temporary cooldown of the market. We are even seeing some price drop in some parts of the US and Canada.
In summary, lower interest rates is one reason why houses are so expensive now.
2. Higher building cost
The cost of land, building material, and labor have been rising for the past decades which inevitably push the price up.
The pandemic also shut down many ports which restricted some building supplies from entering.
With fewer building supplies, the cost of building a house gets higher. Higher building cost then gets passed to the property consumer.
It’s also worth noting that houses in America and Canada aren’t built to last.
Compared to houses in Europe, many of which are still standing 200 years later and being lived in, the houses in the US and Canada are much weaker due to the construction practice that they adopted during the rapid expansion in the early days of the countries.
Houses in America and Canada are often built with wood. The overall quality of the building material is worst than their European counterparts.
Compared to most places in Asia where Earthquakes occur frequently and the use of concrete to construct houses is unnegotiable, American and Canadian houses are far weaker.
It’s also not uncommon to see houses take 3 times longer to construct in Europe compared to America and Canada.
The unusually fast building speed in the US (and Canada) relative to other parts of the world and lower quality building material result in the need for constant costly housing repair.
On average, American move once every 5 years. With each successive move, is a need for newer houses that perhaps would require less fixing and upkeep.
The relentless constant need for new housing coupled with the rise in building costs are more reasons why houses are so expensive today.
3. Labour shortage
During the 2008 recession, many jobs were lost. Not surprisingly, their houses were the next things to go without jobs to afford mortgages.
The price of homes plummeted and so did the need for skilled laborers to construct houses.
Fast forward to today, we are seeing a gap in the number of laborers we need and the number of skilled labor available.
This labor shortage also drives up the price of homes as companies would need to rise the salaries of these workers to entice them to work for one construction company over another.
That rise in labor cost then gets passed to us consumers. The labor shortage is yet another reason why houses are so expensive today.
4. Building laws
In different parts of America, there are building laws that prevent any houses from being built.
Some of these laws pertain to the following:
- Specific areas are reserved for single-family housing development (No duplexes, townhouses, or apartments)
- Height restrictions (ex. No building over 2 stories tall)
- Parking space restrictions (Some residential areas are required to leave 2 parking spaces for each unit of housing so an apartment of 100 units would require 200 parking spaces. For this reason, many apartment complexes that do get built aren’t big)
- Amount of land per property (Each property must take up a certain size of area so these properties are overwhelmingly reserved for wealthier people to purchase)
To further explain the zoning law, 82% of all residential land in the bay area is zoned for single-family housing. Duplexes, townhouses, apartments, etc can’t be built in those areas.
All these building laws were introduced in the early days of US history when majority-white neighborhoods want to keep their neighborhood predominantly white and worried about the change in demography as more apartments get built.
It’s hard to challenge the building laws as most residents in these areas are happy to keep the property mostly detached in their residential zone.
This, however, contributes to the unaffordability issue of housing such that some bus drivers and teachers working in the zone have to resort to sleeping in their cars.
If the building laws don’t change, we’re likely to see a worsening of the housing affordability problem.
5. Not enough supply to meet demand
There is a huge gap between the demand for housing and the supply there is available to fill that demand.
There are a lot more people who are looking to buy a house than there are enough homes for people to consider.
From the year 2010 to 2019, there are fewer homes built in the US than in any other decade starting from the 60s.
The construction of new starter homes (less than 1400 sqft) has also been dropping significantly.
Starter homes are typically smaller but cheaper. They are the go-to houses for young people in their 30s or early 40s but fewer starter homes are being built.
Starter homes make up 40% of houses built in the 80s but today they make up just 7% of new houses being built.
Some estimate that there is about a 3.8 million housing shortage in the US in 2020, up from a 2.5 million housing shortage in 2018.
The problem of the housing shortage is being seen all around the world, not just in America.
To tackle this housing shortage, we need to build more houses and we need to consider more affordable housing plans such as apartments and duplexes rather than focusing on the construction of more single-family homes that are out of most buyers’ price range.
The average age of homeownership
For the above 5 reasons, the average age of first-time homeownership has been rising.
According to self.inc, in America, the average age of first-time homeownership is 33 in 2020 up from 29 in 1981.
In Canada, the average age of first-time homeownership is 36 in 2020 according to mpamag.com
How do you afford a house sooner?
So given the issues presented, how can you afford a house sooner? For starters, here are a few things you can do to speed up the time to house ownership.
- Consider moving out of the city
Housing in the city is ridiculously expensive. If you can work from home or if you are self-employed, consider moving to the city for cheaper, bigger properties.
- Consider smaller properties
Smaller properties are usually cheaper than larger properties.
- Buy a fixer-upper
Buying a house that requires some work may be a good idea as you can customize your house to your liking plus you get to save money when you acquire it for cheaper.
- Start a side hustle to increase income
With more income, you can save more money and with more money saved, you can buy a house sooner.
Check out the ‘make money’ section here on HelloMoneyTree for some make-money ideas.
Click here to read the 36 passive income ideas that you can start working on today.
- Learn to invest
This is not financial advice but you may want to look into investing if you want to own a house sooner.
Investing works best if you look at it as a long-term game. You can’t avoid risks entirely but you can learn to manage them.
- Consider buying a house with a friend or family
More and more people are buying a house with a friend or family especially as more millennials and Gen Z are considering being single for life.
When you only have one income to work with, it can be more difficult to acquire a house.
You can buy a house with someone you trust and share the profit when you resell later on.
Make sure to sign the necessary documents so you don’t get either of you into legal disputes later on. This should be one of the last resort as obviously buying a house with someone else other than your spouse isn’t ideal.
Again, I’m not a financial advisor. Please do your due research.
Final thought
So here we are, those are the reasons why houses are so damn expensive today.
What do you think?
There are certain things we can do as a society to make houses more affordable to everyone.
I think it’s ridiculous that a teacher or a bus driver can’t afford to live in the county they teach.
There was a time when you can buy a family home and a vacation home on a one-person salary while working a normal job. Today, even with both parents working long hours at a decent job, house ownership can still be a long way off.
I will write an article on how we can address the housing issue we face today. Stay tuned for that.
I wish you the best of luck in your house-hunting process. 🙂
