Saturday, 14 June 2014

The British obsession with property

This is a version of a speech given at IPPR North on 10th June 2014.

How many people reading this post own their own home, or would like to do so?

I do. I am one of the 60% or so of people in the UK who own their own home. The percentage is currently falling, as housing becomes more expensive and mortgage standards are tightened. But it is still well over half the population.

Opinion surveys consistently show that most people aspire to buy their own home. For many young couples, buying a home together has become a statement of commitment: the traditional sequence of engagement followed by marriage is replaced with moving in together then buying a home together. Property has replaced children as the outward sign of shared lives and shared responsibilities.

Nor is it just couples. Single people, too, aspire to buy property. They may not want a relationship but they want to own their own place.

But why are we so obsessed with property? It's expensive to buy and expensive to maintain. If we neglect it, it decays. It discourages us from moving to find better-paid or more interesting jobs. And as the US housing crisis shows, there is no guarantee that it will necessarily be worth what we pay for it. It is a risky investment.

Housing is indeed expensive to buy, though the burden does vary: in the North East of England, property is nowhere near as expensive to buy as it is in the South East. Yes, people earn more in the South East – but the difference in mortgage commitment far outstrips the difference in incomes.

But it has not always been so expensive to buy. Housing is considerably more expensive now than it was twenty years ago. And because house purchase is a long-term commitment, therefore, housing is not as expensive for the old as it is for the young. The longer ago you bought your property, the cheaper it was to buy and the more you have benefited from rising house prices. Not only that, but older property owners who still have mortgages have benefited hugely from the very low interest rates in recent years. Their mortgages are low risk because they are so small relative to their property values, and therefore they are paying far less in interest than people who have bought more recently. I admit, I am one of them: my mortgage has been at 1.5% for the last six years. My parents never had it so good.

But property prices even twenty years ago were high compared to those enjoyed by the post-war generation. My parents bought their first property when I was three. My mother didn't work, so the mortgage was granted on the basis of my father's income alone, and he paid all of it. A single male middle-income earner could afford the mortgage on a three-bedroom semi in the suburbs of London.

Now, the house I grew up in is beyond my reach: indeed it is beyond the reach of most people I know. One middle-income earner can't possibly afford that house now. If my parents lived now, both of them would have had to work full time in good jobs to afford that house.

They sold that house when I was sixteen for approximately double what they paid for it. And they bought a six-bedroom Victorian house in Beckenham for £16,000 – again, on my father's income alone. They sold it in 1998 for £200,000. Anyone who thinks that house price inflation is a recent phenomenon should look at the rise in house prices over the last 50 years. Yes, the last ten years or so have been insane. But the previous forty weren't much better.

Yet the evidence that house prices have risen to levels never imagined by our grandparents doesn't dissuade people from buying. Indeed, people are MORE likely to buy when house prices are rising, because they think they can benefit from the house price rises. And they have reason for believing this. House prices have risen pretty consistently for over fifty years: yes, in that time there have been three crashes, but the losses in the first two have all been more than recovered, and the losses from the most recent one will soon be recovered too. Property is risky in the short-term, but as a long-term investment it is high-yielding and virtually risk free. And that makes it a better investment for ordinary people than virtually anything else. No wonder people prefer to buy property than save in bank accounts or stocks & shares.

So the fact that property is expensive, and becoming ever more expensive, is actually one of the principal reasons why people want to buy.

Property is expensive to maintain: if you own property, the entire cost of maintaining it falls on you. But maintaining your property maintains its value, and improving it generally improves its value.

Perhaps more importantly, though, ownership of property gives people a degree of control over their home environment that they don't have in rental accommodation. Yes, you are responsible for maintaining and improving your property: but you have freedom to decorate your house in every colour of the rainbow, plaster it with garish stone cladding, concrete over the garden and – provided your neighbours agree – build ugly extensions. When Right to Buy was first brought in, Bromley Council sold off its houses at a rate of knots, while neighbouring Lewisham Council sold as few as possible. You could tell when you crossed the borough boundary between Lewisham and Bromley; the appearance of the houses changed from uniform drabness to a riot of colourful home improvements, many of them admittedly in questionable taste. Often the first thing a former tenant did when they bought their council house was paint the front door a different colour. It marked the place as “theirs”.

The desire to have a place that is “yours” is very deep-rooted. I remember Liam Halligan talking about his parents, immigrants from the West Coast of Ireland (another place obsessed with property) working incredibly hard to afford to buy a house. He described it as “an asset that no-one could take away from them”.

Of course, a mortgaged property CAN be taken away from you, if you default on your payments. But no-one can come and serve notice on you to quit because they want the house back. The lack of protected tenancies in the UK is a serious driver of the desire to buy, rather than rent. But I still think that the desire to control your own environment is at least equally important. Council tenants when Right to Buy began had protected tenancies: they were difficult to evict even if they were massively in arrears. But they still wanted to buy their own places.

There is also the desire to have something to show for all those years of paying for shelter. Rent or its equivalent is usually the largest item of household expenditure. So it's understandable that when mortgage payments are similar to rentals, people might find buying, rather than renting, attractive. After all, mortgages come to an end, and then the house is yours. Renting never ends.

But I think there is something even deeper – and that is the desire for attachment to “place”. Young people often like to wander, and for them property is not only too expensive, it is too much of a tie. But most people eventually want to stop wandering and put down roots. They want to be part of a community. And for people with children, stability of place and involvement with the community is extremely important. Buying a house is making a statement that says “this is MY place. This is where I want to be”. It's no accident that the classic 1920s property resembles an upturned ship, sometimes complete with portholes. Once you've upturned your boat, you will go sailing no more. "Dunroamin", indeed.

The British obsession with property is as much emotional as financial, driven by the need for stability, the need for security, the need to prove that you have a place in the world, the need to show that you are a person of substance. What is the first thing that people who suddenly acquire wealth do? They buy a large house. It's the modern Western equivalent of owning a lot of cattle or large amounts of valuable jewellery, both of which have in many cultures been ways of impressing the neighbours. 

We often think that the driver behind people's desire for property is the need to fund their old age. And to an extent, that is true. But actually many people don't regard their houses as pensions, and they resent being expected to sell their houses to pay for residential care – even if they cannot live in their homes any more. They want to pass their homes on to their children. A house, once bought, is yours not only while you live, but yours to dispose of as you please when you die. Thomas Piketty reminds us that inheritance is becoming more important as capital destroyed by the cataclysmic wars of the 20th century gradually rebuilds. For many young people, inheriting capital is becoming the only way they can afford to buy a house. Or perhaps, being gifted capital rather than inheriting. Many parents and grandparents now are remortgaging or selling their own properties in order to provide their descendants with the means to buy a house.

To my mind it is completely immoral that the owners of houses should be supported in their dotage by the taxes of those who are not rich enough to own houses, purely so that those home owners should be able to bequeath their property as they see fit. Where is the justice in such a scheme? Thus inequality is perpetuated down the generations: but because home owners vote, politicians will always accede to their demands, however unjust. Attractive though it may seem to require that the elderly fund their own care from the sale of their own assets, this is unlikely to happen while they and their legatees make up the majority of the population.

The property-owning revolution of the last fifty years was founded on the concept of individual, rather than shared, ownership: there have been experiments with various forms of shared ownership, but they remain limited and at time exploitative. The vast majority of people wish to own their houses outright. They wish, in short, to own and control an asset.

The owners of assets understandably wish to ensure that the assets yield a positive return: this is as true of property as any other kind of asset. And when housing is seen first and foremost as an individual asset, rather than a basic need common to all, the ownership of housing becomes a zero-sum game. Those who own houses want to ensure a positive yield, but they can only do so at the expense of those who do not own houses.

And yet....with all this emphasis on ownership, we forget about the primary purpose of a house. It is not to provide a high-yielding safe asset for people with wealth to spare. It is not to show to the world how rich you are. It is not even to provide you with a link to your community. It is, first and foremost, to provide shelter. And the fact that 60% of the UK population like the value of their houses to rise means that there are a growing minority whose basic need for shelter is not adequately being met. Reducing housing benefit payments whilst house prices are rising prices people out of rented accommodation, because rentals tend to reflect house prices. The bedroom tax forces people into arrears because of a shortage of smaller properties for them to move into, and because of inconsistent and at times illegal enforcement of the new rules. Homeless people are left with nowhere to go, and overcrowding is becoming more common.

Much is made of the shortage of housing supply. But this cannot be relieved while home owners expect rising prices and the private sector is relied upon almost exclusively to relieve supply pressures. Builders will not build into a falling market: home owners will obstruct developments they believe will reduce their house values. The two combine to prevent us building the houses we need.

If we wish to break this doom loop, we need a resurgence of social housing – both to rent and to buy. We need a return of long-term protected tenancies. We need alternative savings vehicles to break the dependence on property. We need to find other ways of enabling people to feel in control of their finances, their environment and their lives, both now and in the future.

But beyond that, we need to re-think what we mean by “ownership”. Perhaps we could look at limiting individual ownership to a lifetime, just as hereditary peerages have given way to life peerages, so that property cannot be bequeathed. Perhaps we need to reinvent he concept of “family” or “clan” property, enabling whole communities to own and control their own land and property down the generations. Though I am not blind to the problems with this – exclusion on grounds of race and class, for example. There are no doubt better ideas.

But of one thing I am certain. The present arrangements for ownership and control of housing foster inequality, injustice and social exclusion. As we move from a competitive society to a collaborative and sharing society, so our attitude to property ownership needs to change. We need to rediscover and recreate the “commons”.

Related reading:

A question of justice

A version of this post can also be found on Pieria.co.uk

7 comments:

  1. If you have not already read it I think you will find Danny Dorling's book "All That Is Solid" of interest.

    http://www.dannydorling.org/books/allthatissolid/

    Interestingly he argues that it is not so much a problem of volume of supply but mainly of distribution.

    ReplyDelete
  2. Excellent post. A few random data points/suggestions:

    1. For all the "renting is just throwing money away" nostrums that get spouted, nothing *like* the same stigma attaches to interest-only mortgages.
    2. Legal bias toward owners. Tax most obviously, but also other things, e.g. if you lose your job you're required to burn down savings before being eligible for benefits, but not to sell your house.
    3. The value of a paid-off mortgage goes up as lifespans go up; it's like an annuity paying out owner equivalent rent.
    4. While you're right that far too many people see unaffordable housing as something to celebrate, I wonder if a disproportionate part of the problem isn't more concentrated, in that most MPs buy a second property at taxpayer expense for the duration and will either sell it or rent it out when they lose office. Giving our representatives diametrically-opposed economic interests to the people they supposedly represent does not seem a particularly good idea.

    ReplyDelete
  3. Stop inflating the money supply so that cash retains its value in the long term and people will tend to keep their savings in cash, because there will be a slight positive return from interest, while a house costs money in repairs. While the State continues to inflate away (or allow the banks to increase the money supply ad infinitum) then people will understandably steer well clear from holding cash and instead aim to hold assets that cannot be replicated at the push of a button. Its not surprise that property booms have only come largely since 1970 when the gold window closed. A person who had a few K in 1970 to invest would now either have a house that's now worth hundreds of thousands, and a rental income to match, or cash worth a couple of months wages and a few pounds interest per year.

    Stop stealing savers capital via inflation and the housing market will return to its pre-1970 state - houses being regarded as places to live in, and potential money sinks to boot. Properties in now uber-desirable villages were bulldozed in the 50s and 60s, no-one would touch them with a bargepole, they were just dead weight costs.

    ReplyDelete
  4. I'm totally out of my depth here so pace anyone who wants to shoot me down in flames, but I seem to have got the idea from Robert Peston's "How do we fix this mess" that the Basel Rules introduced risk-weighting for loans and in the case of mortgages these are lower risk-weighted hence more attractive to banks than for example loans to genuine wealth creators. So you have governments aiding and abetting the banks in creating a property-based business model and by extension an over-heated property market. #phoebeBlogs

    ReplyDelete
  5. To be honest, I think you are making too much of this. There isn't all that much unique about housing. People buy more of a lot of things when prices are high. Gold rose from $300 an ounce at the beginning of the 2000's and when it passed $1000 I guess you could say it was "highly priced" and yet investors and speculators continued to buy and pushed it all the way over $1900, after which it has declined to $1250 or so.

    So what was the "real" or "reasonable" price of Gold; the price you could compared today's price to and say if Gold is cheap or dear? I'd say that there isn't one. The price of Gold is determined by what financial resources investors and speculators are willing to divert from other markets into Gold. And that seems to be "more" when the price appears to be rising, and "less" when the price of Gold appears to be falling. In other words, the price of Gold is partly determined by the price of Gold, and by the perception of the trend.

    Same story with houses. In the UK it's a truism that you can "never lose money in property" and if you do lose money there was a bubble, or too-loose lending, or "something".

    Well, I think that's nonsense. Housing has one fundamental property, which is that if you own, you don't have to pay rent. And if you own for long enough, inflation will make you look very clever. Inflation will also erode the real burden of your mortgage.

    And housing has another fundamental property, which is that an ordinary citizen can obtain leverage when investing in property that they could get nowhere else. No-one will lend you 90% to buy Gold, stocks, shares or any other long-term asset. So buying a house is the best long term wealth accumulation strategy for anyone outside the finance industry, and if you hold it long enough, it's close to being a one-way bet.

    I don't think there is any obsession with housing at all. With good management housing is a good long-term investment, and the only sizable one an ordinary person can make. And with bad management, you can end up buying at the top of a bubble and looking bad for a while.

    ReplyDelete
    Replies
    1. There is one fundamental difference between gold and a house. You don't need gold. You do need somewhere to live.

      You have focused so much on housing as an investment that you have completely ignored the essential need for housing as shelter. If housing (and associated rentals) is so expensive that a substantial minority of people cannot afford shelter, it is over-priced.

      Delete
  6. @jon livesey: I think the key difference is that it doesn't much matter if 90% of the population can't afford to buy gold. "Good investment" and "bad investment" are not the only two possibilities; the third is being excluded from the market altogether as prices soar to levels only affordable by speculators.

    You admit yourself that "it's close to being a one-way bet". That's not some fundamental natural law. That arises from specific policy decisions - regressive council tax, weak renter protections, negligible property taxes, mortgage guarantees, ZIRP, BTL interest writeoffs, default forbearance, housing benefit and others - that have to be balanced by disadvantaging other kinds of bets, such as saving or productive investment.

    In other words, policy has screwed over and continues to screw over those who don't own property for the benefit of those who do, and most especially those who own lots. If you really don't see any problem with that, I don't think we have much to talk about.

    ReplyDelete