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  • Nelson Guedes

The Underlying Causes of Housing Affordability Crisis


Speculation is thought to be the central cause of unaffordable housing, but in reality, it is merely a symptom. The real cause of the lack of affordable housing is the systems that motivate and enable speculation. In order to solve this problem in a sustainable manner, we need to look at the structure of the systems which support and govern the development of housing.

The systems underlying the housing market can be divided into three main parts: land, financing, and development. Problems and solutions for each follow.

The value of the land is distinct from the value of the property that is built on it. Currently, the value of the land is attached to the value of the properties in the market and, thus, the land is owned and sold with the property as though it is an inseparable part of it. The value of the property is determined by the price of resources that went into building it, the cost of labour to build it and the intangible value of the systems which compose it (i.e. an efficient green heating system is more valuable than an inefficient dirty one). The value of the land is determined by the activities of the whole community surrounding the land, it is tied to the productive value of the whole community around it. The productive value of the community is necessarily higher than the value an individual is capable of generating, thus individuals whose net worth is not tied to investments cannot afford to purchase properties because the value of the land is higher than their current and potential capacity to produce. Furthermore, private land distorts the value of land through speculation. Speculation inflates the value of the land, increasing it more than its real value, leading to inflated costs that become even less affordable to residents. To solve this problem, we need to decouple the value of the land from the value of the property. The value of the land can then be held by the community as a whole and in order to purchase housing only the cost of development is necessary to be covered. This solution alone could significantly decrease the cost of housing. Furthermore, when only the value of the property is taken into account, the cost of housing is amortized and decrease over time, making housing even more affordable in the long-run.

Financing is another significant problem. In order to purchase or build a property, we need to go to the bank and get a mortgage. The bank issues currency in order to lend it to us and charges compounding interest. This compounding interest adds a significant cost to the property. The bank doesn’t create any value when lending us the money, we create the value through our work and the bank captures the value of our labour through the mortgage. Aside from the gross immorality inherent in this system, it makes the housing market further unstable as small increases in the interest rates set by the central bank can make previously barely affordable mortgages into completely unaffordable ones, thus potentially collapsing the housing market. This problem can easily be solved with a non-profit local public bank. Rather than getting a mortgage through a private bank that charges us massive amounts of money in interest, we could go to a public bank that charges us no interest and just a small processing fee to cover the costs of providing the service. This solution would further dramatically reduce the cost of housing, leaving only the cost of development to be covered. Without the central bank’s interest rates, that are largely reactionary and blunt in their function, the housing market would always be stable, with the credit issued relative to the income of the debtor and the productive capacity of the local economy, which could be further increased via infrastructure investments funded by the same bank. The value of the land held by the city could be used as one of the reserves to back the fractional reserve lending of the bank.

The last part of the housing equation is the development of the property on the land. Once we remove the value of the land from the picture and we remove the interest from financing we can then move on to address the actual development costs. By now, we have removed at least two-thirds of the cost of housing. The cost of development can’t be completely removed, but it can be decreased if the development is done through a non-profit cooperative. The cooperative would be funded through the same public bank discussed earlier. In this scenario, the cooperative would do all the work necessary to build the property and sell it in the market for the cost of material and energy plus the cost of the labour required to build the property. This would eliminate the profit from the equation and allow workers to earn a living wage in the process.

We can solve the housing affordability crisis far more effectively by addressing the underlying causes rather than just addressing the symptoms. We need to stop and think what the underlying causes of our problems are rather than simply addressing the symptoms on the surface.


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© 2015 by Nelson Guedes

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