How an obsession with home ownership can ruin the economy

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 citizens than the home in which he lived 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 helped by just 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 homeownership is a good thing it's something that they've always been told and as soon as it must be true the obsession with home ownership has had unintended consequences which have not only distorted the housing market who brought the financial system to its knees the realization of the American Dream the envy of the entire world [Music] this is Tim he rents in London this is Deanna 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 Deanna is in no such rush I've been renting for the whole 20 years since I came to Switzerland Deanna rents this apartment with her twin sons and her partner what a visit nd not if loogies super she works as a lecturer at University we've been here for three years and it's really home for us Switzerland is one of the world's most competitive economies and the people who live here enjoy a very high quality of life you'd 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 economists house price index the Swiss housing market is considerably more stable than Britain's a house in Switzerland is worth to 70% more today than it was in 1970 in Britain prices have increased by three hundred and forty six percent in the same period there's evidence to show that ownership rates and market volatility are connected to understand why we need to go back 100 years [Applause] 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 homeowners the idea was that if you're a homeowner when you retire you can sell your home and you can maybe live off the proceeds of that or if you lose your job than you've at least you've got some assets which you can sell policies such as low interest loans tax breaks or 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 ineffective 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 homeowners created more problems than it solves financial catastrophe no and it seems can stop the bleeding the big massive global financial crisis of ten years ago was a housing crisis as homeowners defaulted on their mortgages at record rates it was clear trouble was before a lot of people in America they thought they were making a sensible financial decision by becoming homeowners and that turned out to be completely wrong the crash was a disastrous consequence of the homeownership 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 supplies the whole rich world today builds like half the houses per person than it did in the 1960s the declining 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 homeownership rate is very high homeowners are so-called named things not in my back yard 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 rises prices Lots so in countries like the UK or the US where homeownership rates are fairly high these countries tend to have policies that favor homeownership and tend to have planning systems that need to inflexible supply there's always this question of we'd like housing for young people but we're not going to let it ruin our neighborhood and 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 and 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 their 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 homebuyers 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 and 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's this perception because much of the world that home owning 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 homeownership often cite Singapore as an example of a highly stable country where ownership is high they're 91 percent of the population owned their own home and it comes ninth in the world on the UN's Human Development Index but if we look at Romania there the homeownership rate is even higher but it comes much lower in the world in terms of development which brings us back to Switzerland here few owned their own homes yet it's one of the most developed countries in the world [Music] Switzerland also has a system which benefits renters like Deana renters rights are protected leases can last as long as 20 years and prices are stable you know those years we had never get an increased price even once you could make a 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 a new lower price I think Switzerland is special with regards to his 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 better deal and there's times when homeownership is a better deal when that depends quite a lot the interest rate in the economy but both the theory and the evidence suggests that renting and buying a property end up costing about the same amount kind of over that over the long-run the question of which is better ultimately comes down to a personal preference but the idea that one is inherently an object to be 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 to the peak of the bubble lost out despite this rich world governments continue to invest in promoting homeownership in America and in many other countries there is what's known as mortgage interest deduction this is where homeowners can offset the interest on their mortgage against income tax the u.s. spends about 100 billion u.s. dollars a year on the mortgage interest deduction in the form of foregone 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 healthy by policy is a very ineffective policy the bank that helped you 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 homeownership 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 or mortgage interest deduction and Britain has banned letting agents from charging renters fees but that's not enough it's time to build an entirely new housing market one that actually works a manner I directed this film if you'd like to learn more about the mistakes governments are made when it comes to housing you can click on the link opposite that will take you to a special report by Kalyan Williams and also some of the data and research we used while making this film as always don't forget to Like and subscribe to our channel thanks for watching [Music] you

Channel: The Economist

Views: 1,907,510

Keywords: The Economist, Economist, Economist Films, Economist Videos, Politics, News, short-documentary, home ownership, housing bubble, real estate, real estate investing, investing in real estate, housing market, buying a home, economy

Id: kkVEt5tC2xU

Length: 12min 50sec (770 seconds)

Published: Wed Jan 22 2020

Reddit Comments

[u/Whatsapokemon]

The video hits the nail on the head by saying that obsession with house prices leads to huge problems with lack of supply to artificially drive up prices.

When prices go up without anything about the properties becoming more attractive then it's a really bad system, it's all just manufactured scarcity.

[u/UhUhWaitForTheCream]

For me the home ownership ‘obsession’ is merited and absolutely normal. A healthy human right for a developed nation.

The issue is the wealthy, the lucky and the government have made it lucrative to the point no longer is housing obtainable.

A) the wealthy can afford housing regardless, and sell the stock they have when they want

B) the lucky bought in 20+ years ago and now sit on a plasterboard goldmine they will never relinquish

C) the government created this whole mess in the first place - providing high demand and low supply solutions, favourable tax incentives and the all important negative gearing atrocity.

A, B and C are all united now, best of friends. irrespective of their politics and beliefs, they will never end this friendship.

[u/sketchy_painting]

A massive problem in aus is the terrible rental laws. Renting would be much more attractive if they didn’t treat you basically like a criminal for renting.

[u/hidflect1]

You can buy better apartments for cheaper in central Tokyo than you can in Melbourne.

[u/bott1111]

What this all boils down to... Is property ownership shouldn't be considered a business / income

Getting people into their own homes is good for the economy... Not billing them every week for 4 walls and a roof

[u/JawazSafar]

How impressive that in less than 200 years, home ownership turned from a basic right with easy access to a privilege or a "problem"..

[u/Beezneez86]

Just to add a little fuel to the renting vs buying fire;

So if the costs of the 2 are around the same, isn't buying still way better (at least financially) because you will only be making these payments for 20-30 years while if you decide to never buy and just rent, you will be making these payments indefinitely? Not to mention the asset that the homeowner now has that (typically) increases in value.

E.g. I buy a house and it costs me $25,000 per year for everything; mortgage, interest, maintenance, insurance, fees, rates, etc. I pay this for 20 years (a total of $500,000) and then after that I own it outright and all I have to pay is the insurance, rates and maintenance, lets say $5,000 per year. I do this for the next 40 years and then die. So that's another $200,000 for a total of $700,000 spent on shelter for ones life.

My mate rents a place for $25,000 and manages to stay in it his entire life, 60 years, until he dies. All he pays is rent, no other items. So his total comes to $1,500,000 spent on shelter.

This example is obviously super simplified and doesn't account for many variables, but when comparing apples to apples - am I missing something here? How can people say renting even equal let alone better?

This is the way I've always looked at it anyway...

[u/futsyau]

What scares me the most is that I can't afford to either rent or buy. If it wasn't for cheap board at my parents I would be really struggling & if I was to lose my job, I would be done for.

Very worried for my friends who are the same age and have considerably less assets than that me or have been jobless for months (in my early-mid 20's).

FHLDS does nothing for people like me. It simply increases property prices by a proportionate amount to the increase in available credit; quite dangerous. Most 'modest' houses are above the price thresholds set by the FHLDS (in my area of NSW) anyway. Seems the path to home ownership is to have such a considerable deposit that repayments are easily serviceable on your current income (which for most people, doesn't seem to be rising) with enough buffer for increases to interest rates. This in itself is quite hard to do given that rent is still very expensive; even harder to commit to when the intrinsic value of what you're buying is significantly less than the purchase price.

I can only hope we have a housing correction like the US did starting in 2006.

[u/Land_Tax]

Land Tax