My mum never hesitated from offering financial advice. She lived through rationing and had a background in small business retail, and this context made her famously frugal. Look after the pennies and the pounds will look after themselves, she would utter frequently. Never a borrower or a lender be was another favourite. Most of all, she loved the idea of owning property, epitomized by the phrase safe as houses.
A lot of our values come from our parents, sometimes consciously and sometimes unconsciously, and this homespun wisdom has surely influenced me. The idea of unmanageable debt fills me with fear; I notice a physical reaction whenever I go near a casino. And, sure enough, I bought a house at twenty-two, with a deposit from mum and a loan from some building society. She hated mortgages but accepted that for a London flat an exception had to be made.
Recently my daughter and her husband asked me for general investment advice, and I found myself sounding like my mum, an unpleasant realisation that comes to most of us eventually. They should surely invest in a house, said I, but then my curious brain kicked in and I challenged my own instinct. A couple of weeks later The Economist included one of its excellent special reports, about housing. True to form, it was ready to challenge conventional wisdom. It did not argue that my daughter should avoid property, but it did argue that governments had made a mistake since 1945 in encouraging home ownership as a goal.
I just looked up what flats in that first block have recently been selling for – the internet is a wonderful thing! My 28,000 pounds would now be about 400,000. After inflation, that is price growth of 3.6% per annum, while investing in the UK stock market for the same period would have given a real annual return of 2.4%.
Of course, it is not so simple. There is tax to consider, and moving costs, mortgage fees and interest, and the cost of maintaining the flat, all compared with rental equivalents. Over thirty-eight years, my housing needs have evolved as well, not least because I have only lived in London for ten of them. But I am sure I am not alone in wondering why I didn’t just hold on to the London flat and rent it out – until I remind myself that cash and credit limitations at the time made that quite impossible.
So, must I admit that mum was right, once again? Well, in my narrow case, yes, but for a particular reason. Shell moved me around the UK in my early career years, and had a scheme whereby they compensated for that inconvenience by paying large chunks of mortgage interest, which enabled me to climb the property ladder quickly, as long as I had been on the rungs of that ladder before all the moves started. I was, so I did, and I benefitted.
There are other such special reasons why becoming a homeowner (well, in practice, owner of a small part of a home) as early as possible can be a good strategy. Many are linked to government policy. School quality follows the money, and money is often in districts with barely any rental market. Many countries, including the US, still subsidise mortgage interest. Zoning laws can protect areas with high owner-occupancy, thereby creating scarcity and nudging up prices. There are big tax advantages to having wealth tied up in property, notably estate tax exemptions.
But if we start from economic fundamentals, home ownership is a pretty reckless strategy. Who would want such a large share of an economic portfolio – all the wealth and significant debt - tied up in a single asset within a single class, one where liquidity is low and where values are volatile? It is like taking out a large loan and investing all of it, plus all your other cash, into one stock, one that is hard to trade. Good luck with that one. You might have chosen Apple. But then again you might have chosen GM, or Enron.
Apart from all the special reasons noted above, there are other emotional reasons to buy. The real estate and finance industries peddle nonsense about how homeowners are happier and somehow classier people, and there is something comforting about owning somewhere. There is also one good practical reason – you are hedging your largest long-term liability: if you know at thirty that you will want to live in a part of outer London as a pensioner, you can buy there and avoid the risk of being priced out in your dotage. But nowadays, who wants to tie down their future so specifically?
In the same way that home ownership is rather reckless for an individual, encouraging mass home ownership is reckless for a government. This was a strong argument made in The Economist. You create a massive voting bloc whose prime economic driver is house prices. No wonder all those subsidies emerge and are hard to remove! Zoning becomes a political hot potato, as the NIMBY class grows larger and more vocal. Then there are those who become excluded. I don’t think my mum would have been able to help me climb onto that first rung if the price had been 400,000 pounds. Even more dangerous becomes the asset class that is mortgages, then subprime mortgages and derivatives of subprime mortgages. When that (inevitably) collapses, it affects not just greedy bankers but ill-advised first time buyers as well; families become trapped and blighted.
Mass home ownership is also a constraint to economic and social mobility, because it is expensive to move, and maybe impossible in times of negative equity. The rooted become more rooted, and not for good reasons. Selling off the council estates was Margaret Thatcher’s most brilliant political move, but the long-term consequence is that families have become stuck and indebted: after all those estates were not generally in areas with desirable schools or growth industries or housing supply constraints, so prices have not leapt up like they have in Clapham South.
Because of our international moves, I have lived in rented accommodation for twenty-five years, and I’ve come to prefer it for its mobility and simplicity. It is important to have a large enough rental market in the area; New York’s is a dream, with lots of transparency and churn, and the city council are taking steps to reduce the power of parasitic middlemen even further.
According to The Economist, there is evidence that states that have maintained a lower share of home ownership have benefitted over the long term, for example Singapore over Hong Kong or Germany over France. It makes sense, because reducing friction in a major asset class must help mobility and make economic policy less of a hostage to a large voting bloc and to missteps.
One other interesting discussion in the Economist was over long-term trends. The modern trend towards agility and holding fewer assets and possessions indicates more renting, and even communal renting (sharing spaces like kitchens with neighbours). Mass car ownership led people to spacious suburbs where home ownership became the norm, but that trend is reversing, and autonomous vehicles may accelerate that further.
So there is a growing consensus around a set of policies that would reverse the drive towards greater home ownership, and those same policies would make home ownership a less good bet except in areas of long-term demand growth and supply constraint, such as Manhattan. It makes sense to remove subsidies, to invest to ensure quality schools, mass transit and community facilities everywhere, and to facilitate supply of new homes, including affordable ones, without creating new distortions like rent controls. Taxing property is more equitable than many other targets, while large landlords, developers and realtors need to be regulated carefully. Gently managing the supply side also applies on the way down, so for example the policy of reducing the footprint of Detroit is imaginative and smart.
The first flat in Clapham South worked well for me, so I admit it, Mum was right as usual. But advising my own offspring now indicates a different priority. Buying a house can be smart in an area of constrained supply, especially one where they can see themselves living far into the future. But there is also a strong case for renting and putting any spare cash into other assets, perhaps including a fund that tracks city property prices.
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