Rescuing the housing market

At a meeting in the British Academy yesterday (31 March) details of which are available at: http://www.britac.ac.uk/events/2009/housing/index.cfm) Professor Susan Smith of Durham University’s Institute of Advanced Study chaired a meeting of housing experts from UK and Australia to consider issues and options relating to the current housing crisis. As she stated in the introduction to the meeting, the current housing dislocation is of global proportions, though it has to be said that almost all the presentations and subsequent discussion focused on the situation in the UK, USA and Australia.

The first speaker, Professor Gavin Wood of RMIT, Melbourne, reminded the audience that 30 years ago mortgage lending was undertaken by building societies or banks on the basis of loans financed by savings or deposits and the risks were borne at the local level – the buck stopped with the local manager. As a result, a relatively closed mortgage market operated. In the last two decades, risk has been increasingly spread making mortgages cheaper through competition and stimulating demand.

As the equity in the housing market increased, so did the trend for owners to withdraw some of the equity in their properties. Professor Wood claimed that this was not necessarily to sustain a champagne lifestyle, but to meet routine needs. This is not my experience - many people I know started to live above their means as a result of their new-found housing wealth. When foreclosures started after 2005 this severely depressed prices and equity values dropped accordingly. Did this contribute to increases in credit card debt as people then sought to maintain their newly acquired taste for the high life by any means available?

Professor Susan Whitehead of LSE and Cambridge University introduced her talk by saying she was old enough to remember her first mortgage when access was restricted and had no desire to see a return to those days, though she didn’t say why. She even claimed that market volatility was even greater then than now, though that is not what I remember. She presented the case for shared equity systems as a means of increasing access to affordable housing by people wanting to get on the housing ladder whilst spreading the risk – and benefits. Whilst shared equity is certainly an attractive option, Professor Whitehead acknowledged that it a major reason for its popularity is that it “goes with the grain of individual ownership”.

For me, the surprise was that this was the only alternative mentioned to home ownership. All the speakers seemed to assume that ownership was the preferred option, despite the fact that it is a far lower proportion of all tenure categories in Germany and their economy is weathering the crisis better than that of the USA or UK (Euro problems aside). No mention was made of co-operative housing, public or private rental, or other means of diversifying housing supply to meet the needs of a diverse demand system.

The implication of the presentations was that home ownership is best and that alternatives are probably restricted to flats/apartments in inner cities for the young. This was a profoundly restricted view of the housing crisis facing the UK and USA as I consider it, and does not suggest that these experts should be allowed to have any influence over countries with very different situations, such as developing countries. Sadly, they all too often take their lead from the USA and UK, especially when home ownership and land titling programmes are being so actively promoted by international donor agencies.

Home ownership has been widely promoted in the UK – and internationally – for largely political reasons. In the UK, mortgage tax relief for many years gave financial benefits to those seeking to “get on the housing ladder” (until such artificially stimulated demand led to inflationary prices which negated the benefits and it was dropped). Such benefits were not available to those in social housing, so Thatcher encouraged council tenants to become owners through the ‘right to buy’ programme. The carrot to tempt tenants to become owners was a heavily discounted price (selling off public assets at a knock-down price) and the political objective was to increase the constituency of support for the Conservative party as the one which would protect home owners.

In other words, the housing market has been biased for many years in favour of home ownership and this has attracted a massive level of investment, much of it speculative, rather than based on the desire for living in a decent home. Such a tendency for housing to become yet another market commodity has contributed to market volatility and financial and economic crisis. We do not need help for home owners – we need help to improve the diversity of supply options. Such a diverse system of housing supply is more likely to meet the needs of the UK and USA – and is particularly relevant for developing countries.