The home ownership nightmare

Published in Business Spectator (Melbourne), 1 April 2010

The reader comments on the London Evening Standard website were furious. Anger, contempt and ridicule were poured over poor Jonathan Shaw MP, the minister for the South East of England. But what ghastly crime had he committed to deserve such a treatment?

Shaw’s misdemeanour was simple. He had dared to suggest in front of a parliamentary committee that maybe renting your home was not such a bad idea after all. “Renting is perfectly desirable and meets needs and aspirations. It should be seen more as something that people across the socioeconomic spectrum do – not, as it is perhaps sometimes characterised, as just for people who are less well off”, he said.

The minister has been in public life long enough to know that such remarks would land him in political suicide territory. To question the cult of home ownership may not yet be a punishable offence in Britain, but it is akin to insulting Her Majesty, jumping a bus queue, or learning a foreign language. It’s something that ordinary Brits simply don’t do.

Just like their Australian cousins, most Britons regard home ownership as a good in itself. It is thought to be a panacea for all sorts of social ills, a tool for regenerating run-down areas, a safe investment for retirement, and a key to building a stable democracy. You can spend the whole week watching all sorts of ‘property porn’ shows on British TV that tell you how to build, buy, renovate or sell your home. Politicians regularly talk about it in terms of ‘aspiration’ and promise help for first-timers to step onto the property ladder.

Yet there is a dark side to Britain’s property mania. The stampede into home ownership has created at least as many problems as it has solved. This holds lessons for Australia as well.

For a long time, British house prices only knew one way – and that was up. Annual house price increases sometimes reached the double-digits. Although the property market suffered a correction in the recent crisis, a widespread expectation among the public is that, in the long run, houses are as good an investment as you can find. Whether that is true or not, it has created a rush into real estate. People are prepared to take on ever-higher mortgages to get a piece of the action.

The mortgage lending statistics confirm this trend. Only 10 years ago, total outstanding mortgage debt stood at just under £500 billion ($823 billion), according to the Bank of England. Today, it exceeds £1.23 trillion, which equals about 86 per cent of GDP. The annual growth rate on mortgage debt is still positive at 1 per cent. It is remarkable that not even the most severe recession in decades could reverse the trend towards greater private indebtedness.

However, the British are beginning to struggle under their growing mortgage burden. Interest-only mortgages, which were almost unheard of at the beginning of the century, now make up more than a third of mortgage lending. This has raised concerns, especially since many consumers with interest-only mortgages have no repayment plan whatsoever. Instead, a majority of these borrowers bank on future house price increases to pay off their debt, a report by the UK Financial Services Authority revealed. If interest rates go up and house prices go down, these people have a big problem. No wonder that Moody’s just warned that 80 per cent of British mortgage holders could face a payment shock in 2010 if the Bank of England tightens monetary policy as expected.

High levels of personal debt are a severe, but not the only, negative consequence of Britain’s home ownership cult. It also severely reduces labour mobility within the UK. Economists like Andrew Oswald of Warwick University have long argued that high rates of home ownership make it less likely for people to accept job offers requiring relocation. This is intuitively clear. Whereas private tenants can move from place to place relatively easily, selling your house is a much more expensive and stressful business. As today’s labour markets require a great deal of flexibility, tenants are at a considerable advantage.

Apart from the costs of moving, high ownership rates coupled with big price differentials within a country also make it more difficult for potential workers to move to regions offering better employment opportunities. This is particularly true for Britain. A low-income earner or young graduate from low-price areas like Liverpool will think twice about moving to the much more expensive South East. In this way, existing economic discrepancies within the country are exacerbated by high home ownership rates.

To make things worse, the British obsession with home ownership has left the economy extremely dependent on the housing market. For years, British households have made great use of mortgage equity withdrawal to support their consumption, prop up their pensions, and even finance second and third homes. The correlation between UK house prices and private consumption is well documented, and it may safely be assumed that such a strong link is only possible in a country with widespread home ownership.

Perhaps the biggest disadvantage of high ownership rates is cultural. The phenomenon has created the notion that rising house prices are a good thing. It is quite ironic that in every other walk of life, rising prices are called inflation. Not so in housing: an inflating property market is thought to be ‘doing well’, ‘getting stronger’ or ‘gaining momentum’.

Such language is revealing. It shows how many commentators have lost sight of what a house is, namely a place for people to live in. Instead, it has reduced housing to just an asset class. It may seem absurd, but the British rejoice most over their property market the less they can afford a decent home. No wonder they have given themselves up to the fate of having the smallest, oldest and costliest houses in Europe – “rabbit hutches on postage stamps”, as University of Reading economist Alan W Evans once put it.

The British have cultivated the dream of home ownership so well that it has turned into a nightmare. The fierce reaction to the suggestions by Minister Shaw demonstrates they are not prepared to be woken up.

Australians should not feel too smug when watching the British housing crisis. Whether a politician like Shaw would have received a different reaction in Australia, a country just as property obsessed as Britain, is doubtful, to say the least.

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