Housing

Much is being made in the UK of the fact that home ownership levels are falling and the proportion of renters is rising as though this is a sign of coming doom and gloom, and home ownership is the overridng and all-encompassing sign of economic as well as domestic bliss. There is lots of talk of "people at the bottom not being able to get on the property ladder" and moeny spent on rent as somehow being wasted.

This bizarre view of home-ownership is particularly prevalent in the anglophone world (Ireland, UK, US and Australia being prime examples) as well as some parts of Asia - Singapore, HK and China leap to mind.

All of them view property ownership as some sort of god-given right and an unquestionable good. They also all view "strong" (read high prices) property markets as somehow a sign of a country's strength and stature. Indeed many governments jump on this bandwagon and actively encourage home ownership - many countries treat capital gains on "primary residences" as tax free for example, and in the US agencies such as Fannie Mae and Freddie Mac are effectively government sponsored mortgage washing machines that are specifically designed to allow banks to lend more against property than they would otherwise be able to, so encouraging demand and raising prices. The social argument is that home ownership creates a stable community and binds people together. The economic one that high prices are somehow a sign of economic strength is less clear. It appears to be more based on boasting - "our prices are higher than yours therefore we're better.

Individuals of course get sucked in because of the huge leverage they can get on property. Mortgages of 90+% were not uncommon before the crisis - famously Northern Rock offered over 100% (and look how that ended up - should tell you all you need to know about housing). Ignoring transaction costs (as most property buyers do for reasons i don't understand) this means that GBP5,000 + a 95% mortgage allows you to buy a GBP100,000 flat. 10% price rise to GBP110,000 and if you can sell then you've turned 5k into 15k. Luvvlyjubbly as Del Boy would say.

It was the baby boomers who started it all of course - i can remember my grandfather and my mother both banging on that land and property is a sure fire bet - "they aren't making any more of it". Clearly neither have lived in Asia where land reclamation and development is endemic. They rosde an ever-rising market on the back of financial deregulation and a huge post-war population boom creating strong demand.

Both those influences are going into reverse - banks are slowly being forced to return to the dull utility style industries they should always have been, and most developed countries now have relatively stable populations and many will start to fall over the next decade or so in the absence of immigration.

We keep hearing that a healthy (expensive) property market is a prerequisite for a healthy economy. I would have thought that the recent debacles in the US, Ireland, Spain and to a lesser extent the UK. would have cured people of this view but somehow it keeps coming back. We keep hearing that renting is wasted money, that home ownership is the holy grail. Of course the people who say that are the  same ones that then bemoan the fact that the very healthy market they aspire to mean there are no cheap homes.

High borrowing to "get on the property ladder" leaves huge exposure to downside - if property prices fall your equity can be wiped out almost immediately and you can be stuck - a "mortgage prisoner". The only way out of this is either to pay off the underwater part of your mortgage or default. Both are net withdrawals from the economy through either higher saving to pay it off or a loss as the lender which then has to provision to cover that loss, removing profits that would otherwise have been relent.

Even in a rising market, property ownership creates a highly immobile and inflexible workforce. Property transactions take time and cost money. Many people will not entertain jobs that require them to move house, and large debts mean people are less likely to take entrepreneurial risks and will often settle for the mortgage slavery of a stable job "to pay the bills" rather than a shot at the big time.

In a falling property market lack of equity and a refusal to face losses make the immobility problem even greater. Often this is only resolved by the unfortunate borrower defaulting and parking the loss with the bank. These days many of those banks rely on their respective government to act as lender of last resort to them so effectively the loss moves onto the government books, forcing them to slash spending or raise taxes to cover it.

Lastly, if property is an "investment", as it is widely touted, then why should buyers be protected from the downside, as they have been in the current recession. If they buy a share and it falls in price they don't, or shouldn't, expect the government to cover the loss, so why should it cover a house price loss? Attempting to force house prices higher simply moves the losses on the books of the government and people who were sensible enough to get out before the bubble burst.

Fortunately in many markets it looks like government efforts to prop up property markets are doing little more than slow the fall - the slide continues in many parts of the world, and rightly too. Money freed up from housing investment can then be invested elsewhere in more productive parts of the economy - like making something for instance, and those poor sods who are ripe for a mugging in property an get on to the ladder they so aspire to. Just don't come asking me for a handout when it all goes down the tubes again - as it surely will.