Global Agenda: The gauge of more

What is the source of the myth that home ownership is good for the household, for the economy and for society at large?

June 30, 2011 23:46
4 minute read.
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Housing bubbles is surely THE biggest economic topic for most people in developed countries – and, given the Chinese situation, perhaps globally. Jobs are no doubt more important for the average person, but what people talk about and read about is housing, its price, availability and so on.

Economic historian Niall Ferguson considers the obsession with housing, aka residential investment, as a peculiarly Anglo-Saxon phenomenon. Historically, he is correct, and when you consider that most countries in Continental Europe have managed to grow rich and enjoy very high standards of living, despite not creating a homeownership culture, you can see where he’s coming from.

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But the Japanese property bubble of the 1980s and, more particularly, the Chinese housing boom of recent years, provide convincing proof that you don’t have to speak any form of English in order to indulge.

The Americans are popularly seen as being especially wedded to the home-ownership culture. During and after the property crash of 2007-2009, Democrats and Republicans traded barbs as to who was responsible for creating the bubble by, inter alia, adopting an official policy of encouraging and actively promoting home ownership.

This was laughable and sad at the same time, since any objective observer could see that both the Clinton and the Bush administrations had been “guilty” of these policies, so that pinning the blame on one party and exonerating the other was nonsensical.

Interestingly, in that period – i.e., in 2009-2010 – evidence began to emerge of a backlash, among at least some sectors of society, against the supposed dream of owning your own home. Given the extent to which the dream had turned into a nightmare for so many families, that is perhaps not surprising. However, whether that backlash ever existed, and certainly its ability to survive a return to even a pretence of normality in the real-estate market, is open to debate.

Thursday’s The New York Times reported on a poll conducted in conjunction with CBS that, in addition to the usual questions about how you think Obama is handling foreign affairs, the economy, etc., also asked respondents a series of questions about buying and owning their own homes.

The outstanding finding was that an overwhelming 89 percent of respondents – that’s nine out of 10 – view owning your own home as a “somewhat” (34%) or “very” (55%) important part of “The American Dream.” Opinions as to tactical matters, such as whether now is a good time to invest in a home, were divided, as were respondents views regarding whether (and how) the government should intervene in the housing market. But on the fundamental, ideological and, for Americans, quasi-religious issue of home ownership, there is near consensus: Yes, we must! The recent slump has thus done little to erode the belief of Americans in the importance – social, economic and financial – of owning your own home. But as the German and French experience shows, there is no fundamental or ideological link between how a national housing market works and the pursuit of happiness. Nor do the recent revelations of systematic fraud on the most massive scale in the American mortgage market do much to bolster the myth that home ownership is necessary to ensure a strong and stable democracy.

What then is the source of the myth that home ownership is good for the household, for the economy and for society at large? An interesting piece of analysis, by a Canadian blogger named Ben Rabidoux, considers the little- known but fascinating case of the Canadian real-estate market. Canada and its banks came through the crash in very good shape, because they hadn’t overindulged in any excesses in the precrash years – rather the opposite. But the house-price boom there that had actually begun before the crash, took off after it – precisely because the Canadian banks were in good shape, while interest rates came down to record lows, so that money was plentiful and cheap.

The essence of Rabidoux’s argument is that the primary force driving the house-price boom in Canada is mortgage debt – not physical supply and demand, or other demographic or economic factors. He is probably unaware of it, but the Israeli experience of the last few years is very similar.

We probably had a greater imbalance of physical supply and demand to start with than did Canada, but this is now being addressed, as housing starts climb rapidly.

However, if you allow the banks to pour money into the housing market, then debt becomes the gauge of more, since the pace of mortgage-debt creation will easily outstrip that of additional supply, ensuring that prices keep going up – until the bubble pops. In other words, Stanley Fischer’s imposition of restraint on bank lending is ultimately the critical factor in preventing a bubble, and merely building more apartments will not do the job; indeed, it may fuel the boom, as it did in the US, UK and Ireland.

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