How sweet is home ownership?
by Kathleen Lucia, EAU Vice-President

One of the UK's biggest mortgage lenders, the Halifax building society reported on May 31st that two-thirds of potential first-time buyers have no realistic prospect of owning their own home in the next five years. Worse, they lack the will or wherewithal to save for the long term. Of 8,000 20 to 45 year-olds surveyed by the lender, only 5% of those they dubbed ‘Generation Rent’, are making any serious attempt to save toward home purchase. According to the UK’s National Housing Federation, a trade body, the average time spent renting in England is 16 years, taking the average age of the financially unassisted first-time buyer to 37. And the Federation expects this to rise to 43 as incomes stagnate and credit terms tighten.

All this is in spite of the fact that, according to the investment bank Morgan Stanley, UK house prices will continue to fall, (from autumn 2010) by a further 10% by the end of 2012. The price fall will not be enough to make property more affordable to first-time buyers. All it is likely to achieve, says the bank, is to push more home owners into negative equity and widen the black holes in lenders’ loan books. Lloyds Bank, with a loan book that is 58% mortgages, is particularly exposed, says Morgan Stanley, forecasting that 27% of these mortgages, worth £90bn, will be in negative equity by December 2012. At the same time, an equally alarming report from a UK think tank, the Institute for Public Policy Research, claims that easy lending by British banks has left UK households with bigger mortgages relative to income than in any other major economy. At the end of 2009, says the IPPR, UK household debts amounted to £1.53 trillion, of which £1.19 trillion (78%) was secured on houses or apartments. The UK has the highest levels of mortgage lending as a percentage of GDP – 81% – higher than the US (73%), Canada (49%) and western Europe (44%) – as well as the highest levels of household and business debt relative to GDP.

All this is presented as a serious threat to the fabric of our society. But is it? Is home ownership really so vital to the national well being that all should strive for it? The Halifax argues that because so much of the UK’s wealth is tied up home ownership, any big expansion of the rental sector could widen the wealth gap between home owners and non-owners and lower retirement living standards, as fewer people would have sufficient equity in their homes to support their retirement and long-term care. One may detect some special pleading here, though, and it is not difficult to see that there is good sense in looking for value outside of the residential property market at present. It also follows that those who cannot afford to mount the first rung of the property ladder, probably do not have much spare cash to save. Equally, if the value of residential property as an asset class is falling, perhaps it makes sense to look to invest in alternative asset classes and settle for renting a home.

Yet this slew of reports is tinged with moral panic. For years policymakers in the US, UK and around the Anglophone world, seemed simply to disregard the obvious and steadily inflating house price bubble. And the housing market crash, when it came, mostly affected these and other developed English-speaking countries with their roots in Western European culture, such as Australia, Canada and South Africa. Why? Because at the heart of it all is a firm belief in the intrinsic value of home ownership. Where what are described as “Anglo-Saxon” attitudes to work and wealth prevail, home ownership represents, of itself, a social and economic ‘good’ to be actively pursued. Certainly in the US and UK, policy formers and makers have considered it axiomatic that home ownership helps householders accumulate wealth through the value of their property asset and encourages them to put down social roots in a community, raising children and engaging in community activities. Home ownership is believed to produce stable, law-abiding and gainfully employed folk who raise children who are, similarly, well-socialised with a tendency to perform better at school and stay off state welfare and social “at risk” registers.

Professor Thomas Shapiro, a US expert in public policy who has carried out vast research into causes of greater poverty among black Americans compared with white, believes that home ownership is the single most important way in which families can accumulate wealth and has described it as a “transformative asset”; one that gives families access to resources or social status they would find very difficult to achieve through earned income alone (inheritance is another).It is on research outcomes like this that the US government based its policy of encouraging home ownership among black Americans. In 2002 the US President George Bush declared home ownership to be at the heart of the American dream and introduced a set of housing policies designed greatly to increase home ownership, particularly among minority groups.

Home owners are perceived to feel they have a stake in society and the economy and therefore to save and invest more and to take a more long-term view of their jobs. Ownership is therefore also seen to feed into socio-economic mobility, not least because the home owner benefits fully (taxes aside) from any capital appreciation of the asset when he sells, which he may choose to do whenever and to whomever he pleases. Owned homes are also widely usable as collateral in buying other goods, services and financial products, giving the home owner considerable financial flexibility that a renter may not have. Another benefit, largely exclusive to home owners compared with other types of tenure is the ability to control the cost of occupancy, in that home owners can change mortgage providers to achieve a better deal, without having to move home. Further, an owned home is the only financial asset that can be ‘consumed’ by the owner while he or she is investing in it and, usually, does not depreciate while it is being consumed.

David E Smith of the US Home owners Institute: “home purchase leverage can be much more favorable than stock-purchase leverage because the owner-borrowers react very differently to financial reverses in the invested asset. Unlike stocks, investors in their own home use the asset for an essential activity – living, so to lose the asset renders you homeless. People fight like tigers to prevent that – several centuries of borrower repayment history offer evidence – so capital markets will offer high leverage to home buyers”. He adds: “Believe it or not, the impact of falling prices is much less about foreclosures, several million of them though there are, and much more about reduced household equity for consumption: even against the mammoth $14.1 trillion US economy, withdrawing that much consumer liquidity – one third of annual GDP – in a short interval is a devastating blow to economic activity”. And it demonstrates, he says, that home ownership, feeding into the construction industry and into residential equity build-up, is an engine of economic growth. But most importantly for individuals, there is security of tenure: the home as castle, or as Smith puts it: “the right of a home owner to live inside the home secure from the world’s intrusions; one of the most fundamental principles of property rights and law. Even delinquency and foreclosure, which allow lenders to regain that right, are heavily circumscribed. Security of tenure, that sense that no one else is entitled to a key into one’s home, is psychologically powerful, and a right of privacy that most of us fiercely defend....that security of tenure, that right to avoid dispossession, is the most absolutely fundamental right of home ownership, and the one that all of us at some level instinctively crave and value”.

But are these benefits truly “goods” arising from home ownership in itself, or are they political constructs – benefits arising from purely political preferences and attitudes and from the legal and fiscal decisions arising from them? Is it home ownership that conveys the benefits of socio-economic stability, or is it simply that well educated, well socialized and aspirant people tend to choose it, because successive governments have made it so advantageous? Nobel prize winning US economist, Paul Krugman, is inclined to think the latter. In an article for the New York Times he strongly challenged the desirability of ever-increasing home ownership as a policy goal of governments. He wrote: “Listening to politicians, you’d think that every family should own its home — in fact, that you’re not a real American unless you’re a home owner. ‘If you own something,’ Mr. Bush once declared, ‘you have a vital stake in the future of our country’. Presumably, then, citizens who live in rented housing, and therefore lack that ‘vital stake’, can’t be properly patriotic. Bring back property qualifications for voting! “And the belief that you’re nothing if you don’t own a home is reflected in U.S. policy. Because the IRS (US Internal Revenue Service) lets you deduct mortgage interest from your taxable income but doesn’t let you deduct rent, the federal tax system provides an enormous subsidy to owner-occupied housing. On top of that, government-sponsored enterprises — Fannie Mae, Freddie Mac and the Federal Home Loan Banks — provide cheap financing for home buyers; investors who want to provide rental housing are on their own. In effect, US policy is based on the premise that everyone should be a home owner”.

But there are some real disadvantages to home ownership, says Krugman. First, there is financial risk. If the market value of the house falls, the buyer can easily lose his or her entire investment. Many of the 22 million Americans who bought homes between 2005 and 2007 now face a heavy loss, he points out, around half of them are in negative equity (the value of their mortgages exceed the value of their property). Then, owned homes cannot encourage economic mobility: homes are notoriously illiquid assets which can take considerable time and expense to sell. Krugman puts the average cost of a house move at more than $60,000, making home owners reluctant to move to where jobs are in times of economic stress. Further, there is the cost of commuting. Buying a home at an affordable price frequently means buying far away from where jobs are concentrated to where land, and housing, is cheaper. The cost of getting to work, though, can be increasingly expensive and time consuming. The fact is that home ownership isn’t for everyone, declares Krugman. “In fact, given the way U.S. policy favors owning over renting, you can make a good case that America already has too many home owners. All I’m suggesting is that we drop the obsession with ownership, and try to level the playing field that, at the moment, is hugely tilted against renting. And while we’re at it, let’s try to open our minds to the possibility that those who choose to rent rather than buy can still share in the American dream — and still have a stake in the nation’s future”.

But, Douglas E French, president of the libertarian Ludwig von Mises Institute, takes this argument much further. In his book, Walk Away: The Rise and Fall of the Home-Ownership Myth, French recommends that distressed mortgage holders simply do walk away from their houses and their debt obligation, an act he describes as ‘strategic default’. Introducing his polemic, he writes: “The idea that a man’s house is his castle is attributed to American revolutionary James Otis from 1761, and his idea was that government should never be permitted to breach its walls. It is a good thought, in context; one that sums up a dogged attachment to the right of private property. “In the 20^th century, however, government got behind the idea that every citizen should be provided a castle of his or her own. This is the essence of the good life, we were told, at the very core of our material aspirations. The home is the most valuable possession we could ever have. It is the best investment, even better than gold”.

The view that this assumption was at best overly simplistic and misguided as an article of faith became clear in the housing crash. French says: “The home was the very foundation of community, of freedom, of the American dream. It embodied who we are and what we do…this dream was smashed as home values all over the country plummeted, wiping out a primary means of savings”. French scents the beginning of a complete change in ethos as the fallout from the crash settles: “This change begins with a single realization: I’m paying more for my house than my house is worth. What precisely is the downside of walking away, of going into strategic default? I lose my house. Good. That’s better than losing money on my house”. The reality is that a house is no different from any other physical possession, he says: “It has no magical properties and it embodies no high ideals. It is just sticks and bricks”. And strategic default is not unethical, he argues, just an extension of economic rationality. “Strategic defaulters do not set out to defraud their lenders by taking the money and running. They made their payments and watched the value of their property sink. They approached their lenders to work out a compromise to no avail. In financial self defense they are forced to walk away…There will be no salvation for those who sacrifice and put their financial futures at risk to remain current on an underwater mortgage. Whether you can pay or not, if it makes sense to walk away. That’s what a person should do. ”No obituary will ever read : ‘He was a good and ethical man. He died broke, his family suffered, but he never missed a payment to Fannie Mae’”.

The upshot, French claims, is that millions of aspiring home owners have already walked away from their mortgages. “The new source of value”, he writes, “is not something attached to the biggest thing we own, but rather in the most fundamental unit of all: ourselves and what we can do.” Already, he claims, younger generations of Americans are dumping their fixed abodes in favor of greater mobility, even international mobility, as rising unemployment bites. Central to his thesis is that on a deep level, the Anglophone world may already have moved on psychologically from the view that home ownership is highly desirable in itself. Says French: “We live in times when physical ownership is becoming ever less valuable as compared with the life we can create for ourselves in the world of digits that show no plots of land and national borders. Just as capital itself became internationalized several decades ago, with great gains for freedom and prosperity, we might all follow that trend today, walking away from the mess that the state has made and creating a new life for ourselves that defies the impulse to control”.

All this can sound very much like taking a crisis and adding high melodrama to it. Nowhere in the world is defaulting on debts consequence-free. Defaulters can be and often are aggressively pursued, facing the loss of any other possessions to creditors; a ruined credit rating that makes further borrowing impossible for years and possibly the loss of a job or job prospects as a result of reputation damage. French’s approach is certainly not one for the faint-hearted, calling to mind, as he does, the original pioneering spirit of those willing to cross vast distances and take on huge physical, mental and emotional challenges to build lives for themselves. Yet floundering home owners facing an absolute loss on their property, may well consider default a viable option. It certainly was a phenomenon observed in the last UK housing bubble collapse of the early 1990s.

After all, as Adam Smith wrote in The wealth of Nations, a couple of centuries ago: “a dwelling house, as such, contributes nothing to the revenue of its inhabitants”. It is a point of view that might well chime with ‘Generation Rent’ as they approach middle age, especially as the quality and availability of rental property improves in response to market demand; as tenancy agreements become better tailored to different types of renters and as work patterns and practices change in response to technological change. Today’s 20 to 30-somethings may well be seeing home ownership more as a burden than a boon.