Are Homeowner Societies More Resilient?

Being a homeowner: to some, it is a dream for which they are willing to work hard and bear a substantial financial burden. To others, it is an undesirable combination of maintenance effort, bureaucracy and reduced mobility.

Seemingly, this polarization of opinions applies at a broader level, too. The United States, in which homeownership is an integral part of the American Dream, treat it almost like an institutional right. However, with ownership rates around 65%, they are far from being top of the list of homeowner societies. Especially in some eastern European and Asian countries, ownership rates north of 85% are quite common. In stark contrast, less than 40% of all households own their home in Switzerland. These vast discrepancies raise the question whether, from a societal perspective, universal homeownership is a desirable goal. I discuss this question mainly from an economic standpoint, thereby omitting the role of cultural preferences, which may induce justifiable ownership gaps rates across different societies.  

Homeowner Societies – Wealthy Societies?

The most common argument that is brought forward in favor of promoting homeownership is a financial one. ‘Getting on the property ladder’ is often seen as a prerequisite for households that want to accumulate wealth in the absence of large inheritances. This is supported by the fact that homeowners are, on average, indeed significantly more wealthy than comparable renters. [1] It is tempting to attribute this to a tendency of houses to keep rising in value, to the benefit of their owners. In reality, however, property prices fluctuate over time and there is little evidence that investments in real estate are inherently more profitable than those in, say, stocks. [2]

A more subtle explanation for observed wealth differences between renters and owners is based on the tax treatment of the latter. In many countries, homeownership is heavily subsidized: one the one hand, owners can typically deduct large amounts of their mortgage interest payments from the income tax. On the other hand, ‘imputed rent’, i.e., the rental income that owner-occupants could have earned by renting out their unit instead, is largely exempt from taxation. While these factors do indeed benefit homeowners financially, they are also immensely expensive for the taxpayer and whether they are desirable or not is hugely controversial. [3]

Another channel via which homeownership can bolster financial stability is via mortgage repayments. Recent research shows that amortization schedules induce households to build up home equity (i.e., wealth) simply by making monthly mortgage payments. Interestingly, these recurring payments do not lead to reductions in other forms of saving. In effect, many homeowners have therefore accumulated substantial savings after their mortgage is paid off, regardless of whether the value of their home has increased or not. [4] Once more, however, this mechanism is not one that is unique to the housing market. Wealth accumulation by virtue of making re-current monthly payments can be achieved by savings plans that involve other assets, such as stocks or bonds. While it is true, therefore, that homeownership offers one way of promoting prosperity and financial stability, there are alternative ways of achieving the same end in societies with low ownership rates.

The Cautionary Tale of 2008

The prospect of promoting wealth, even among those at a distance to financial markets, make “homeownership for all” seem like a noble policy goal. However, there is an obvious issue: mortgages are expensive, and not everyone can afford one. In the United States, the Global Financial Crisis of 2008 has illustrated this in a grim way. Lured by low interest rates in the early 2000s, paired with the promise of ever-increasing property prices, millions of low-to-medium-income households took their chance to get on the property ladder. As mortgage rates increased and house prices suddenly collapsed, many of these households were unable to make their monthly payments and had to sell their properties at enormous discounts – seeing their American Dream turn into a nightmare.

While the US housing market crash may well have been a unique event, the lessons it offers are valuable nonetheless. Most importantly, the mortgage market must not be left unregulated, as neither banks nor borrowers are well-equipped to decide on their own who should obtain credit and who should not. In the Netherlands, an independent institution for responsible household budgeting (NIBUD) offers a good example for prudent regulation: it defines borrowing limits for households of a given income, based on the current interest rate environment and macroeconomic conditions. These rules are lenient enough such that also lower-medium income households have access to mortgages, if they amortize over sufficiently long periods. However, they are also prudent enough to avoid defaults as much as possible – and therefore necessarily exclude some aspiring buyers from the housing market. 

Non-Financial Dimensions of Homeownership

While financial considerations are most prominent in the political debate about homeownership, the academic literature has addressed several other factors as well. Most of these are linked to increased residential stability of homeowners compared to renters, i.e., their tendency to stay in the same place for a longer period of time. Empirical evidence suggests that this increased residential stability improves child education, clearly a desirable policy goal. Next to that, a number of studies have argued that it also improves democratic participation, especially in local elections, since homeowners are typically more interested in policies that affect the amenities of their close neighbourhood. While increased participation, in and of itself, is similarly desirable, more recent studies have highlighted the downside of it: “not-in-my-backyard” behaviour, or NIMBYism. Given their interest in promoting the value of their own property, homeowners have an incentive to support all policies that do just that. And while some of these political initiatives may be as benign as improving waste management or planting more trees, others can involve vetos against asylum centers or outright bans on new construction, as residents in some of the most expensive neighborhoods in the world are currently pursuing. [5]

A clear consensus about whether high homeownership rates are net positive, from a societal perspective, is elusive. At the very least, however, the mixed evidence on the benefits of homeownership should lead policymakers to think carefully about their agenda. If there exists a hypothetical “golden rule” homeownership rate that maximized societal welfare, this rate is most definitely not equal to 100%. Thus, the pursuit of high ownership rates by any means necessary, including substantial fiscal effort, seems hardly defensible from an economic point of view. This does not mean, however, that the legislator should stay clear of the housing market. In many societies, homeownership will remain a core element of the cultural DNA. Making sure that the available housing stock is allocated in an equitable way, such that potential benefits of ownership do not only accrue to those with the largest purchasing power, will remain an important challenge in the foreseeable future.

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