article on home ownership

1. 7/27/13 The cult of home ownership is dangerous and damaging - FT.com
www.ft.com/intl/cms/s/0/00bf5968-f518-11e2-b4f8-00144feabdc0.html#axzz2aEeHxTBv 1/4
Y
July 26, 2013 7:28 pm
The cult of home
ownership is dangerous
and damaging
By Adam Posen
The US and UK should ditch their obsessions with residential
property, writes Adam Posen
ou would think that the residential property bubble and subsequent crisis of the past
decade would make people leery of widespread home ownership, and governments
reluctant to pump it up. Yet, here we are again.
Despite the continuing fiscal tightening, the UK coalition government is pressing on with its
“Help to Buy” scheme and the US Congress continues its unquestioning protection of the
home mortgage interest tax deduction. This is the economic policy equivalent of incurring
the individual and social costs of an obesity epidemic while still subsidising maize and beef
production – but maybe more fixable.
Things do not have to be this way in the Anglo American economies. Policies to increase
home ownership do not necessarily improve the supply or distribution of housing, as the UK
experience demonstrates, and often works against it. The OECD’s Better Life Index shows
that no relationship exists between a country’s home-ownership levels and its average
©Jonathan McHugh

2. 7/27/13 The cult of home ownership is dangerous and damaging - FT.com
www.ft.com/intl/cms/s/0/00bf5968-f518-11e2-b4f8-00144feabdc0.html#axzz2aEeHxTBv 2/4
housing satisfaction and quality. And there is no iron law that higher-income economies must
have higher rates of home ownership: Mexico, Nepal and Russia all have home-ownership
rates of more than 80 per cent, while 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 per
cent.
The real issue, however, is the harm done by efforts in the UK and US to maintain and
increase that rate. Start with the distortion to savings behaviour that mortgage subsidies and
high loan-to-value ratios encourage. For many American and British households, their home
equity is their primary financial asset. In other words, we incentivise middle-class
households to leverage the bulk of their savings into a highly volatile, difficult to price asset,
which is subject to disaster risk both idiosyncratic (fire, tree falling on the roof) and general
(flood, local industry closure), and which – based on the economic fundamentals – should
return at best the average rate of local wage and population growth.
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. But they constantly hear the misleading mantra that renting “is
throwing money away” while incurring mortgage debt “builds equity”. So their savings go
into housing, which puts them to little productive purpose 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). Overinvesting in
bricks and mortar is a losing proposition for the households involved – but also for the
economy as a whole.
The mass movement of voters’ savings into an inherently risky asset also creates demands
on policy makers to provide capital gains on housing that their constituents otherwise would
not receive. As a result, we get a combination of regulatory measures, local stimulus plans,
subsidies to property lending and bias towards inflation that promote housing bubbles. And it
is housing booms and busts that wreak the most havoc on economies of all bubbles, including
through the concomitant destruction of banking systems. This was evident from history even
before our current crisis, as my colleague Tomas Hellebrandt and I have shown.
But 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. This danger alone would
be justification enough to having governments lean against housing price swings, as opposed
to pursuing policies that promote real estate speculation by individuals.
The costs of excessive home ownership, however, go even further. The promotion of such
ownership is fundamentally regressive. It perpetuates inherited wealth and subsidies of
middle-class children. 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

3. 7/27/13 The cult of home ownership is dangerous and damaging - FT.com
www.ft.com/intl/cms/s/0/00bf5968-f518-11e2-b4f8-00144feabdc0.html#axzz2aEeHxTBv 3/4
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Help to buy - but not to rent
residency. They come 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.
Home ownership also directly discourages economic flexibility. In new research, my
colleague David Blanchflower and Andrew Oswald of Warwick university have found that
rises in the home-ownership rate in a US state are a precursor to eventual greater rises in
unemployment. Home ownership damages employment through three powerful channels:
decreasing levels of labour mobility, increasing commuting times and diminishing creation of
businesses. Their evidence suggests that the housing market can produce negative
“externalities” on the labour market.
Of course, in a free society, people who want to own homes and have the means should be
able to purchase them, just as they would any other luxury item. But our governments do
not need to subsidise that purchase. Increasing home ownership does not increase housing,
least of all for the poor. Increasing home ownership in the US and Britain beyond what the
free market would generate does, however, distort capital allocation, put a large share of
household savings at unnecessary risk, impede mobility, and creates a powerful lobby for
government transfers to the wealthy. And it creates housing bubbles to devastating effect.
When we are attempting large fiscal consolidations, could we at least start by ending these
destructive housing policies rather than cutting useful investment and progressive
programmes?
The writer is president of the Peterson Institute for International Economics
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