We are obsessed with real estate. Dinner parties in big cities in the West are often dominated by talk of a new house, an old one that was just sold, or another one that somehow, sadly, fell through.
The housing ladder concept, indicative of inter-generational, even class-based social angst, as well as investment acumen are first guiding principles. Meanwhile, for an increasing part of the population in the West, homeownership is becoming ever more distant a dream. How do we square the circle?
I don’t say that owning a house is bad. However, a society with an almost unnatural obsession with homeownership has its drawbacks. These get compounded if you have a large degree of buy-to-let (BTL) added to the mix.
Herewith, in no particular order, some thoughts on why I think we should stop obsessing about real estate.
1: The “lives not lived”: A lot of people (myself included, usually around moving time) are showing an almost addictive behavior when it comes to browsing on real estate websites (my favorite used to be this). A survey done in Canada has some astonishing figures, as does this Guardian article. Basically, we look a lot more than we transact. Can a house transform your life? Is this the paradox of choice? Perhaps real estate is not to blame for this, but it certainly fuels the fire of our individualistic consumer societies.
2: As the housing ladder is becoming almost impossibly steep, herd instincts vie with increasing exasperation. Our economies are still hooked on accommodative monetary policy, so interest rates remain low. But house prices are high, particularly in big cities. The window of opportunity seems to be closing, and the UK may show the way forward: As the FT reports, the interest paid by owner-occupiers has been falling for over five years, and the money paid to landlords has risen, now accounting for double the former. In other words, if you don’t own already, you may be too late to the party, looking at a life paying rent to your (private, i.e. in the UK primarily buy to let) landlord.
3: Knowing that their own economic fortunes are tied to this narrative of the property ladder, the owning part of the population is steering against an intergenerational fall in homeownership. The Conservative government aims to boost the Help to Buy program. FT experts extend advice to 18-year-olds that they should build assets early, ideally by buying a house. Friends’ parents help their children with their downpayment.
4: Is that really bad? After all, the usual narrative is that renting means paying into someone else’s pocket. Instead, by owning one can save a large portion of the rent and in exchange build assets for retirement. How about today? A 20% deposit on a place worth half a million means confining a lot of capital (and paying a lot of upfront fees on top) to eventually socially unproductive uses. Your financial returns depend on the market going up, your ability to charge high rents, or forego paying them (all of them, of course, are related). The higher house prices go, the more deadweight capital we have to commit. Your individual decision to rent may not be so stupid after all.
5: We haven’t even mentioned flexibility yet. You have much more of it if you rent. If you’re given a decent set of rights that allow you to stay as long as you want, that is. This is perhaps the most private of the factors, so I proceed without dwelling on it for too long. However, the effects homeownership has on the psychological characteristics of a society are clearly not trivial.
6: How about buying real estate as an investment? Buy-to-let is by definition rent seeking behavior and creates no inherent value, unless, of course, you do up old places and provide the market with additional rental space. Buy to let benefits those disproportionately with access to (cheap) capital, putting those at a disadvantage who cannot borrow. Some claim buy to let is morally wrong. I think it just doesn’t tally with the promise of a homeowners’ society.
7: Our economic real estate obsession leads to worse living conditions when newly-built condominiums are designed with their resale value in mind above all other considerations. You don’t need to be a major social critic to lament the fact that glossy PR and build quality are often diametrically opposed. Our idea of home becomes meshed with our idea of capital appreciation.
8: Inequality worsens as house prices go up, adding an unhealthy dynamism to most other points on this list. What is worse, housing policy disproportionately benefits rich and upper middle class households and leaves out in the cold those at the bottom of the housing divide, especially renters. In the U.S. this has increasingly corrosive social effects.
9: Homeownership and growth are not positively correlated. And while real estate investments may have contemporaneous positive effects on economic growth, evidence from China suggests that there is a significant negative lagged effect. This is consistent with the next point.
10: A booming real estate sector crowds out bank lending to other sectors. It also attracts an outsize share of labor and capital that may go to more productive ends, e.g. in export-oriented industries. And let’s face it: Most if not all success of a real estate investment is related to broader market forces, not individual acumen.
11: Points 9 & 10 suggest that our current obsession with homes and our investment in the sector is at best growth neutral and at worst a real drag on our economies’ productive capacities. That is not to say that we do not need investment in the real estate sector. Quite the contrary.
12: Owning a home makes you more conservative. “Indebted homeowners don’t go on strike.” A vested interest in lower interest rates makes fiscal deficits less acceptable. But if we think this through, it is hard to be just fiscally conservative while maintaining liberal social values.
13: The obsession with housing prices threatens to turn lively urban areas into “lifeless dormitory towns”. Again, parts of London showing the way forward.