The cult of home ownership is dangerous and damaging
There was a July 26th article in the FT which carried the same title as this commentary. As I read it, two Roberts came to my mind. The first was Robert Shiller’s (Sterling Professor of Economics at Yale) writing in the NYT on July 13th as he explained why “Owning your own home is not always a virtue”. The second was Robert Kiyosaki’s Rich Dad, Poor Dad which proved that for many of us, a house is a liability not an asset. Regardless, the FT piece by Adam Posen makes 4 important points about why this political and cultural preoccupation could be, for some of us, so dangerous.
Firstly, as seen here in the UK, policies to increase home ownership do not necessarily improve the supply or distribution of housing. In fact, it often works against it. In fact, the OECD’s Better Life Index shows that no relationship exists between a country’s home-ownership levels and its average housing satisfaction and quality. As for the British / American notion that higher-income economies must have higher rates of home ownership: Mexico, Nepal and Russia all have home-ownership rates of more than 80%. The French, German and Japanese rates are 30-40 percentage points lower. The US and the UK rates sit between them at about 65 to 70%. Shiller notes that in 2010, only 36.8% of Swiss homes housed an owner-occupant while in the United States that same year, the rate was 66.5%. Yet Switzerland has a GDP that is 4% higher per capita, than that of the US.
Secondly, home ownership also directly discourages economic flexibility. New research from Warwick university found that rises in the home-ownership rate in a US state are a precursor to eventual greater rises in unemployment. How? Home ownership damages employment through three powerful channels: decreasing levels of labour mobility, increasing commuting times and diminishing creation of businesses. Evidence suggests that the housing market can produce negative “externalities” on the labour market.
Thirdly, average individuals cannot calculate, let alone reasonably project, the running costs and financial risks of their housing investment as opposed to renting and putting their savings in more stable, liquid assets. This despite the misleading mantra that renting “is throwing money away” while incurring mortgage debt “builds equity”. Posen points out that home equity is not as productive as compared to investing in new businesses, infrastructure or research and development – or, for that matter, compared to rental housing that provides the same services but costs less (when individuals are not paying for the option on artificial capital gains that goes with ownership). Shiller agrees and goes on to remind us that a goal of “Own Your Own Home Day” was to emphasize thrift. In a 2011 paper, James M. Poterba of M.I.T., Steven F. Venti of Dartmouth and David A. Wise of Harvard showed that retirement saving in most American households was inadequate and that most households nearing retirement in 2008 had most of their wealth in home equity.
Fourthly, if the disasters in the UK and US were not enough, recent events, including overheated property markets in China and Turkey, further illustrate the point. Yet the costs of excessive home ownership go even further as the promotion of such ownership is fundamentally regressive. How? Posen argues that it perpetuates inherited wealth and subsidies of middle-class children as the accumulation of housing wealth benefits those simply lucky enough to have had grandparents who were homeowners. Any policies to promote younger people “getting on the property ladder” will disproportionately benefit those fortunate children who have been given savings, have parental co-signers and can show stable prior residency. This comes at the cost of spending that money elsewhere, say on housing credits for the poor. They also perpetuate an influential lobby to protect mortgage debt and housing assets from taxes, whether while living in the asset or passing it on to family members. Like all favouritism to the children of the relatively rich, this discourages the development of new talent and competition, and thus is economically harmful.
So why, despite the present fiscal pressures, do certain governments such as our UK coalition government promote its “Help to Buy” scheme? And why does the US Congress continue its unquestioning protection of the home mortgage interest tax deduction? Posen jokes that this is the economic policy equivalent of incurring the individual and social costs of an obesity epidemic while still subsidising maize and beef production. Federal Tax Singapore
Somehow Posen strikes me as naïve. I smiled as I read his piece. To get the answer, I would recommend that Adam Posen read another of my favorite magazines - the Spectator.
Firstly, Posen needs to read Maurice McLeod. McLeod did not mention it but home owners are more likely to vote in general. McLeod did mention in his July 26th article that home owners are more likely to vote conservative. This is probably why Thatcher started her ‘right to buy’ policies. This is probably why a broke Chancellor offers underpriced debt to those of us he wants to turn into Tory voters.
Secondly, the US and the UK government are deliberately reflating the housing bubble to help stimulate the economy. In May this year, Merryn Somerset Webb wrote about this saying that
“…most people will tell you that house price inflation is down to the huge demand in the UK for houses. After all, we have a small island and a growing population, they will say, so house prices can’t ever really fall much. This is nonsense. The reason, and the only reason, that house prices have not collapsed in Britain as they have in, say, the US and Ireland is because the government has not allowed them to. Our base bank rate is the lowest it has been since 1694. This has brought mortgage rates down substantially. On top of that, just to be sure, pressure has been put on the banks to hold off on repossessions.”
Thirdly, given the fact that we have been told that home ownership is a good thing, property bubbles tend to create a feel good factor.
The irony is, if any of us were politicians in a country where the population have been converted to the so-called cult of home ownership, and the economy depended as much on the property bubble as the US and UK do, would you or I act differently? I doubt it.
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