Eighteen people are dead in riots in Santiago, the once-halcyon capital of Chile, a beautiful city long favored as an expat retirement haven. The scale of violence, as well as the death toll, surpass the toll in Hong Kong after months of disturbances. In Chile, the trigger for riots was an increase in the cost of public transportation. In Hong Kong, it was a proposed change in the autonomous region’s extradition law.
No two cities could be more different than Hong Kong and Santiago. It is hard to find any common political theme. But they have something significant in common: Real estate bubbles in both venues have priced housing outside the means of ordinary people, and especially young people.
As the charts below make clear, the cost of housing has risen much faster than wages in Chile and Hong Kong.
Commentaries in the world media, from the New York Times to Germany’s Die Welt, point to “inequality” as the source of Chilean rancor. That’s partly true, but misleading. It isn’t inequality as such that drives people into the streets, but harsh fact that decent living space is inaccessible to the less affluent.
According to a Sept. 19 Washington Post commentary, “Hong Kong’s real estate has for years been ranked the world’s least affordable. For example, a one-bedroom unit in Tuen Mun in the New Territories – about an hour by subway way from Central, the main business district – costs the same as a two-bedroom apartment on New York’s upmarket Upper East Side. Prices have risen by 48% over the past five years. According to Demographia, it takes almost 21 years of an average household’s entire income to purchase a home, compared with 12.6 years in Vancouver and 8.3 years in London. Renting is hardly more palatable. Rates for apartments in the ex-British colony are higher than for similar-sized dwellings in San Francisco, New York City and Zurich.”
Chile’s government raised the minimum wage to 350,000 pesos a month, or US$482. The average monthly wage is about $795.The average monthly rent for a one-bedroom apartment in Santiago is about $460 a month (a one-bedroom on the outskirts will rent for $389 a month, according to numbeo.com). A three-bedroom apartment rents for $800 a month inside Santiago and $669 in the suburbs. As in Hong Kong, the numbers don’t add up: both labor-market entrants and older workers struggle to pay rent. It’s not surprising that an increase in rapid transit fares sparked protests.
Around the world, housing prices have risen much faster than incomes. Hong Kong and Santiago are among the most egregious cases. The problem isn’t the housing market as such, but the market for al income-earning assets. After the 2008 financial crisis, central banks around the world kept interest rates extraordinary low. Nearly $20 trillion of government bonds now trade at negative interest rates, something rarely seen before in financial history, and never for such an extended period and on such a scale.
That forces investors to shift money from government bonds to other income-earning assets, notably real estate, as well as equities. Loose monetary policy, though, hasn’t produced a corresponding boom in productivity-enhancing capital assets. Labor productivity has lagged through the past 10 years of monetary laxity. That explains why asset prices have outstripped wages. Real estate is simply another asset class, a bubble on the wave of monetary easing.
The asset price bubble disrupts the lives of families around the world. In the United States, the rate of home ownership has fallen from an all-time high in the mid-2000s to the lowest level since the 1960s.
In northern Europe, central bankers warn darkly of a wave of wealth destruction were the present bubble in real estate prices to explode.
Redistributing income won’t satisfy the protesters in Santiago or Hong Kong. The issue isn’t inequality, but rather the radical redistribution of wealth in favor of pre-existing holders of assets due to low or negative interest rates worldwide.
The root cause of the problem is the lack of high-productivity outlets for capital investment that would also raise the marginal product of labor and support a rise in real wages.