Mr Mouse claims in a comment that widespread home ownership is undesirable. I would not go quite so far; there are benefits to home ownership – primarily the removal of the costly landlord-tenant relationship. Having said that, we are in agreement that the situation where the typical person’s investment portfolio consists solely of a highly leveraged bet on his local housing market is undesirable to the point of insanity. The point has been made widely, e.g. by Shiller.
But even if we accept a public policy aim of increasing home ownership, making it easier for people to borrow money is not the obvious way of going about it. If we want more people to own, say, smoke alarms, the way we do it is to make smoke alarms cheaper. Similarly, if a government decided, rightly or wrongly, that it would be better for more people to own houses, the obvious approach would be to make houses cheaper.
Headline of today’s London Evening Standard: “Worst House Prices Fall for 18 years“. I don’t remember reading recently about the “worst oil price fall” or “Worst computer price fall”. How is this?
The answer is obvious: once you have started down the road of encouraging home ownership by increasing borrowing, rather than by reducing prices, there is no turning back.
If I buy a computer, I don’t care what happens to its market value after I bought it. I will use it for 5-10 years then throw it in the bin. It is a physical asset, not a financial asset. If I borrow money to buy something, however, it is not just a physical asset. It is collateral. If I have been encouraged to get into this position, then undermined by a deliberate policy of devaluing the collateral, I will feel betrayed.
And so the process is continued. Interest rates are held down. The private sector’s lending standards are attacked. The supply of housing is deliberately restricted. After a while, it becomes obvious to everyone that a crash must come sooner or later. But even that is not enough to stop it. By that point, not only the government but also a large proportion of the population and a significant proportion of the financial industry is dependent on the bubble continuing – not for ever, as that is obviously impossible, but for long enough for “something to turn up” to save any individual participant. To someone looking to profit from the inevitable, the question is the usual one: “will the market stay irrational for longer than I can stay solvent?”, but with a coalition of politicians, swing voters, rich bankers and the construction industry devoted to keeping the market irrational, the question is even more pointed than usual.
The idea that one ameliorates one’s lot by cutting out the landlord-tenant relationship is a function of the particular place and time we live in. If electricity were subject to ever increasing price rises, we might think that happiness depended on acquiring our own generator, and want to place photovoltaic cells on the roof. If farmers were allowed to keep putting up prices, we would want to grow our own food, and no house would suit us without a quarter acre of land.
As it is, only house prices are allowed to rise in this absurd manner, which causes everyone to think they are disadvantaged if they don’t own one. However, in a situation where there was more available housing than people wanting to live in it, rents would fall to the extent that the blind panic to acquire property would evaporate. Indeed, home ownership was comparatively rare in Scotland as recently as the 70s, I seem to remember, and my grandparents’ generation generally eschewed house purchase if it meant getting into debt.
I say only house prices, but public transport in England and certain other countries has been allowed to become so expensive or non-existent that everyone wants to own a car, another socially undesireable phenomenon.
I don’t really see that the green belt is solely to blame. Why do houses in the North of Scotland cost £300,000? London does have a disproportionately small number of flats in the suburbs, and large number of villas (2 storey houses).