‘Buy a home’ a wise man once told me, ‘it’s the best investment I ever made.’ And he’s right, real estate has made lots of people in Western countries better off – but at a high price to national development. Because while home-buying is good for the individual, it can be terrible for the economy.
Think about it. A house produces nothing. As a country, we ought to be putting our resources into training our workers and starting new businesses. While countries like Germany seem to get this, investing heavily in skills training, others gear their education policy towards producing lots of university degrees, which do little to improve productivity.
As for launching new businesses, sadly, in much of the West new investment goes heavily into real estate. Last year Adair Turner, who headed Britain’s Financial Services Authority at the time of the global financial crisis, came to Cambridge to deliver a lecture in which he pointed out that over the last half century, real estate has become so important that it now accounts for more than half of all investment in the developed economies. In the United Kingdom, only about a sixth of new bank lending goes towards creating or expanding businesses. While the ratio of wealth to income has risen across the West, which Thomas Piketty has argued is itself a serious problem, most of this growth has been due to the rising value of real estate, which is where we’re sinking ever more of our money.
As a result, home-ownership has actually become a serious obstacle to economic growth. In his new book, Tyler Cowen points out that people who own their homes are much less likely to pack up and go to where the opportunities are. Americans, the folk whose restless spirit once led them to answer calls to ‘go west young man,’ now stick with dead-end jobs – or even no jobs – because they can’t flip their houses.
I was recently chatting over pints with a friend of mine who said he’d be delighted to move to London to take advantage of the opportunities here, and to apply his considerable talents, but reckons he’ll never be able to contemplate the move due to the sheer cost of housing here. And don’t even think of starting a business or opening a shop unless you have deep pockets. London rents will absorb most of your revenues, leaving little to develop new products or improve your technology.
A recent study by the Bank for International Settlements has revealed that where house prices are strong, growth is weak. With investment skewed towards acquiring real estate, as Lord Turner noted, the only thing underpinning growth is consumption. Home-owners who see their property values going up will boost their home-equity loans and hit the shopping centres. With little new business investment, though, productivity remains low. Britain is now trapped in a bizarre syndrome that one third of its people now earn more from their houses than they do from their jobs. Why create an enterprise or upgrade your skills when you’re sitting on a magic box that churns gold out of nothing? It’s the fairy-tale dream.
The solution? Governments need to stop privileging home-ownership and adopt policies that weaken, rather than strengthen, the housing market, like improving the rights of renters or confronting the NIMBY Syndrome: opening up more development and building more housing units. Fat chance of that happening anytime soon, though. All these measures would hobble and possibly depress real estate prices. And with a majority of voters invested in real estate, and with home-owners more likely to vote than renters, governments everywhere bend over backwards to keep them happy.
Politicians and economists celebrate the bank bailouts of the last financial crisis for having staved off crisis, and keeping millions of peoples in their homes. But there’s another way to look at it. Imagine the housing market had been allowed to collapse. The un- or underemployed would have walked away from their homes and gone looking for new opportunities, and low real-estate costs would have allowed more people to afford houses and open new businesses. Instead, we’re stuck with the perverse situation that amid stagnant productivity growth but pricey real estate, London, for one, now has eight empty houses for every person rough-sleeping on its streets.
The uncomfortable fact is that what’s good for our investment portfolios is slowly strangling the economy. Those of us with houses might leave our children and grand-children a nice home, but deprive them of a lot of the opportunities we and our parents had. Still, change may be coming. Young people, operating in the gig economy and renting, or even sharing their accommodation, are rising as a political force. With more interest in a flexible economy geared to renting and entrepreneurship, their votes may eventually tip the balance. This division between owners and renters may exert a greater impact on our future politics.
Image: Outside the Tower of London, March 2017