Published in The National Business Review (Auckland), 10 March 2017
If you are familiar with British popular history, you may recall this incident from the winter of 1991. A severe weather system had crippled British Rail’s services, despite the company’s claimed best preparations for snow and ice.
When a manager of the rail company was then asked by the BBC to explain what happened, he gave the famous answer that it had been “the wrong type of snow.”
Ever since we have known to distinguish between things that may look and feel the same but that are actually quite different.
Homeownership rates, for example.
In recent times, we have had regular reports about falls in the proportion of New Zealanders owning their own home. You can bet your house on it (if you still own one) that each time this happens, the opposition will cite this as evidence of the housing market crisis.
There is only one problem with this kind of reasoning: Homeownership rates as such do not tell us much about the state of the housing market. They are an ambivalent indicator.
To explain what I mean, just imagine a housing market in which house prices would never change in real terms. What kind of homeownership rate would we expect in such a market?
Obviously, without the prospect of price increases, people would only buy homes not for capital gains but for the services they provide. You would only buy property either to live in it yourself or for the rental income it might generate.
Then again, in such a scenario you might prefer to rent your home since you are not missing out on any capital gains. On the contrary, you could invest your money elsewhere and enjoy the freedom to move elsewhere at lower transaction costs (and have someone else pay for maintenance).
For these reasons, a stable housing market might well yield relatively low homeownership rates. And just if you are thinking that this sounds like a theoretical example, look at Switzerland and Germany to see such markets in practice. In both countries, housing markets have been stable for long periods of time and home-ownership rates are low.
Obviously, the Germans and the Swiss were rational enough to draw the right conclusions from their property markets.
Now imagine another kind of market. Think of a housing market that is typically producing strong capital gains. Maybe not every year but on average over the cycle. Again, what kind of homeownership rate would you expect?
Obviously, when house prices tend to go up over time, renting automatically becomes a less attractive option. Rather than leaving the capital gains to your landlord, you would try to realise them yourself.
The drawback of this is that people would try to become homeowners who otherwise would have preferred the flexibility of renting. Younger people could well be better off if they are not tied to a particular place but they might still buy property for fear of missing out on housing market gains.
From an economic perspective, this type of reasoning is entirely rational given circumstances. And it is the prevalent mode in which housing markets in New Zealand, Australia and the UK work.
We would thus expect structural house price increases to correlate with high homeownership rates and vice versa.
What we have recently seen in New Zealand, however, are falls in homeownership rates. Does this mean our housing market is finally becoming more stable or affordable?
Well, far from it. What we are seeing is the property market’s equivalent of the wrong type of snow.
New Zealand’s homeownership rate is falling not because people are giving up on the expectation of future capital gains. The rate is falling because even people convinced of future price increase are now unable to enter the market since the price level is already too high for them to enter.
In this way, we are seeing the worst kind of homeownership rate falls. It is a fall not driven by increasing affordability but by rampant unaffordability.
What does this mean for our political discussions? Well, first of all that we should not regard the homeownership rate as the most important measure of a functioning housing market. Just because the ownership rate is falling does not tell us much on its own.
Neither is a high ownership rate necessarily a positive.
A much better measure of the state of the housing market is house prices or rather house price-to-income ratios. It is only the latter that can give us an indication of how affordable or unaffordable a housing market really is. And movements in these ratios are a much clearer indication of the state of the housing market than any changes in homeownership rates.
The obsession with homeownership is unhealthy and, unfortunately, it is an obsession that is shared by both left-wing and right politicians. The Labour party, which recently voiced its concerns about the decline in homeownership, may be surprised to find itself in the company of Margaret Thatcher, who once propagated a “property-owning democracy” and the “right to buy” council houses.
There are falls and there are rises in homeownership rates, and yet they are all the wrong type of snow. The only thing that matters is affordable house prices and that is difficult enough to achieve.