How an obsession with house possession can spoil the economic system | The Economist

published on July 3, 2020

As the saying goes, a man’s home is his castle

There is no one factor more representative of the economic well-being…

…of the American citizen than the home in which he lives

It’s not just the American Dream

Across the rich world people have been told…

…they should be buying their own home

Now’s the time to buy a home

Get on the housing ladder

Starting from under $60,000

Help to Buy is helping people get their foot on the housing ladder

Owning a home is a part of that dream

But why is there this pressure to get on the property ladder?

People don’t really question the idea that home ownership is a good thing

It’s something that they’ve always been told and assume it must be true

The obsession with home ownership has had unintended consequences…

…which have not only distorted the housing market…

…but brought the financial system to its knees

The realisation of the American Dream, the envy of the entire world

This is Tim He rents in London

This is Diyana She rents in Zurich

Tim is 30 and works in sales…

…and he’s desperate to get on the property ladder

It’s incredibly frustrating not to be able to own something of your own

But Diyana is in no such rush

I’ve been renting for the whole 20 years since I came to Switzerland

Diyana rents this apartment with her twin sons and her partner

She works as a lecturer at a university

We’ve been here for three years and it’s really home for us

Switzerland has one of the world’s most competitive economies…

…and the people who live here enjoy a very high quality of life

You would think that would mean that most people

would own their own home

Far from it

At 38%, Switzerland has the lowest home-ownership rate in the OECD

a group of mostly rich countries

In Britain it’s much higher

Two-thirds of houses are owned by the people who live in them

According to The Economist’s house-price index…

…the Swiss housing market is considerably more stable than Britain’s

A house in Switzerland is worth just 70% more today than it was in 1970

In Britain prices have increased by 346% in the same period

There is evidence to show that ownership rates and market volatility

are connected

To understand why, we need to go back 100 years

At the beginning of the 20th century the majority of people…

…in Britain, America and other developed countries were renters

In Britain, for example, just one-in-four families owned their own home

But after the second world war many governments…

…across the rich world made a monumental shift in policy

They decided to create nations of home-owners

The idea was that if you’re a home-owner…

…when you retire you can sell your home…

…and you can maybe live off the proceeds of that

Or if you lose your job…

…then at least you’ve got some assets which you can sell

Policies such as low-interest loans, tax breaks on mortgages…

…and relief on capital-gains tax were put in place to promote home ownership

All of which add up to quite a big kind of, in effect…

…a subsidy from the government for home ownership

From the 1950s home ownership shot up

As did the amount of money banks gave in mortgages

By 2008 mortgage lending was worth 63% of rich countries’ GDP

But in the long run…

…this new world of home-owners created more problems than it solved

Financial catastrophe triggered

No one, it seems, can stop the bleeding

The big, massive global financial crisis of 10 years ago was a housing crisis

As home-owners defaulted on their mortgages at record rates…

…it was clear trouble was…

For a lot of people in America…

…they thought they were making a sensible financial decision…

…by becoming home-owners…

…and that turned out to be completely wrong

The crash was a disastrous consequence of the home-ownership boom

But the damage caused by encouraging people to buy their own houses…

…runs far deeper than financial crises

The fundamental problem is to do with lack of supply

The whole rich world today builds, like, half the houses…

…per person than it did in the 1960s

The decline in construction has been kind of concentrated…

…in the parts of the country where you’d most like it to increase

So in those like rich, dynamic, productive, cool cities

Since the first day I arrived in London…

…I’ve been looking at house prices

I think there’s an innate human drive…

…to own something and to call it your own

But when people do buy their own home…

…they’re more likely to resist further development in their area

Christian Hilber has extensively researched the impact of this mentality

In a country where the home-ownership rate is very high…

…home-owners are so-called NIMBYs, “not-in-my-backyard” residents

They try to protect their asset values by limiting a new supply

They vote for politicians that enforce restrictive planning…

…that leads to unresponsive supply

So if the economy is booming and supply cannot respond, it raises prices a lot

So in countries like the UK or the US…

…where home-ownership rates are fairly high…

…these countries tend to have policies that favour home ownership…

…and tend to have planning systems that lead to inflexible supply

There is always this question of we’d like housing for young people…

…but we’re not going to let it ruin our neighbourhoods

I think this mentality, this snobbery, is absolutely out of control

That has to change because people in the millennial generation…

…aren’t able to get the basics they need in life, such as a house

The failure to build, in particular in cities…

…has also held back productivity and harmed economies

When you’ve got expensive housing…

…it means it’s hard for people to move to those cities

And when it’s hard for people to move to those cities…

…it means that they struggle to get the jobs that they want

And what that basically does is constrains…

…the growth of the overall economy

Home-buyers are less likely to become entrepreneurs…

…and less willing to move to find work

Research has shown that historically an increase in home ownership…

…in America has been followed by a sharp rise in unemployment…

…as people are reluctant to relocate to find a new job

The financial crisis put an end to the growing rate of homeowners

Weak-earnings growth and tighter restrictions on mortgages…

…have made it much harder for people like Tim to get on the housing ladder

Politicians are worried about declining home ownership

We’re helping every American find their path to the American Dream

But, in fact, having more renters may not be such a bad thing

There is this perception across much of the world…

…that homeowning is better than renting

It creates a more stable, better society

In reality, there’s only very weak evidence that home ownership…

…kind of creates better citizens

Supporters of home ownership often cite Singapore…

…as an example of a highly stable country where ownership is high

There, 91% of the population own their own home…

…and it comes 9th in the world on the UN’s Human Development Index

But if we look at Romania, there the home-ownership rate is even higher…

…but it comes much lower in the world in terms of development

Which brings us back to Switzerland

Here, few own their own homes…

…yet it is one of the most developed countries in the world

Switzerland also has a system which benefits renters like Diyana

Renters’ rights are protected…

…leases can last as long as 20 years and prices are stable

In all those years we had never get an increased price

Even once, you could make the request to our landlord…

…to reduce the price because the reference interest rates were also reduced

And according to the law, we just wrote a letter, very short

And three months later we got the new lower price

I think Switzerland is special with regard to its rental law

I wouldn’t feel so secure in another country

Renters feel very insecure in this country

We don’t feel we’re getting a good deal

We don’t feel we’re getting good value for money

My main incentive for wanting to buy property is…

…to stop throwing away money every month on rent

This is a common argument against renting—but is it true?

In 2018 renters across most of the rich world did spend more…

…on rent than homeowners spent on mortgage repayments

But to see the full picture, we need to look at all the costs over a longer period

Let’s imagine someone choosing between renting or buying in Britain

If they decided to rent…

…they would give one payment to a landlord every month

But if they decided to buy, their costs would include mortgage repayments…

…plus interest, which can fluctuate…

…and then a whole host of additional costs…

…such as transactional costs, buildings insurance, and maintenance

Once you add up all of those costs…

…there are times when renting is a better deal…

…and there’s times when home ownership is a better deal

And that depends quite a lot on the interest rate and the economy

But both the theory and the evidence suggests that renting…

…and buying a property end up costing about the same amount…

…over the long run

The question of which is better ultimately comes down…

…to a personal preference

But the idea that one is inherently and objectively…

…better than the other is not true

Investing in bricks and mortar isn’t always a safe bet

While many have gained from increasing house values since the 70s…

…those who piled into the American housing market…

…at the peak of the bubble lost out

Despite this, rich-world governments continue to invest…

…in promoting home ownership

In America and in many other countries there is what’s known…

…as mortgage-interest deduction

This is where home-owners can offset the interest on their mortgage…

…against income tax

The US spends about $100bn a year…

…on the mortgage-interest deduction in the form of forgone tax revenue

And the net effect of the policy on home ownership is essentially zero

Christian also looked at a British policy called Help to Buy…

…which is a form of equity loan from the government

The Help to Buy policy is a very ineffective policy

We found that Help to Buy in the Greater London Authority…

…increased house prices by more than the implied subsidy…

…and it didn’t lead to any new housing construction

The case for the government…

…spending all this money on promoting home ownership is quite weak

And they could be putting that money towards…

…education or transport or health care

Rather than creating a stable society…

…home ownership has been the West’s biggest economic-policy mistake

Attempts are being made to redress the balance

America has capped its tax break on mortgage-interest deduction…

…and Britain has banned letting agents from charging renters’ fees

…and Britain has banned letting agents from charging renters’ fees
But that’s not enough

But that’s not enough

It’s time to build an entirely new housing market

One that actually works

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