In praise of renters

My opinion piece today is on the downsides of home ownership. Full text over the fold.

A Home on the Scrapheap, Australian Financial Review, 5 May 2009

Firsts are invariably memorable. Whether it’s a first love, a first job, or a first rock concert, there’s something that sears the memory. So it’s little surprise that canny politicians have decided that when it comes to first homes, they want to be a part of the experience, in the hope that voters might repay the favour when the next election comes around.

The conservative side of politics, tend to argue that we should subsidise home ownership because it encourages economic independence. In the words of Robert Menzies: “one of the best instincts in us is that which induces us to have one little piece of earth with a house and a garden which is ours”. For Labor, home ownership ought to be subsidised on equity grounds. As Gough Whitlam once said: “It is the people’s land, and we will fight for the right of all Australian people to have access to it at fair prices.”

Over the years, the benefits of home ownership have been mythologised by social commentators. An array of lobby groups – from builders to real estate agents to social housing advocates – have touted its advantages. Yet little has been said about the downside. Just because many people eventually buy a house (disclosure: I am one of the 70 percent of Australians that own my home), it does not follow that governments should subsidise first home purchases.

The strongest evidence against home ownership comes from Andrew Oswald, of Warwick University, whose research has shown that countries and regions with higher rates of home ownership tend to have more unemployment. Across Europe, Oswald compares Switzerland, with a home ownership rate of 37 percent and an unemployment rate of 3 percent; with Spain, which has a home ownership rate of 85 percent and an unemployment rate of 17 percent. The explanation for the link is that owning your home tends to lock people into the local labour market. When a region suffers a local downturn, it is easier for renters to follow the jobs. By contrast, owners may opt to stay put. Higher rates of home ownership make for less flexible labour markets.

This is particularly true of Australia, where stamp duty imposes a heavy penalty on residential mobility. In some other parts of the world, residential turnover taxes are about the price of a bicycle. Here, the cost of stamp duty on a given house is likely to be pretty close to the value of the car parked in the driveway.

The potential lock-in effect of home ownership is particularly important when thinking about the First Home Owner Grant. Early in their careers, young workers often switch jobs a few times until they find the firm that is the best match to their talents. But buying a house too early can curtail this process, with the result that employees might end up in jobs that are a bad fit for them in the long run. Alternatively, high levels of home ownership can increase traffic congestion, as job-switchers end up driving across town to get to work.

Another downside of home ownership is that having virtually all your wealth locked up in one piece of property is a risky investment strategy. Although Australian property prices have risen substantially over the past decade, local housing markets can be volatile. Just as government policies on superannuation encourage diversification, housing policies should not push young Australians to over-invest in a single housing asset.

Introduced by the Howard Government in 2000 as compensation for the GST, the First Home Owner Grant has proved as difficult to dislodge as any other piece of middle-class welfare (actually, this one is more like upper-class welfare). In response to the looming recession, the federal government has recently increased its value to $14,000, or $21,000 for newly-built homes. Some states offer generous top-up programs. For example, if you buy a new home in regional Victoria, the state government will kick in an additional $8000.

With the federal grant due to be reduced on 30 June 2009, the government is under pressure to extend the generous credits. In making the decision, they would do well to consider Oswald’s research on the link between home ownership and unemployment. This suggests that as a society, we should be pleased that many young people are renters, and refrain from pushing them to buy too soon. (For similar reasons, public housing should be no more generous than rent assistance.)

Subsidising home buyers may be a good job creation scheme for real estate agents and builders. But if it locks young families into jobless regions, we might end up with a longer recession.

Andrew Leigh is an economist in the Research School of Social Sciences at the Australian National University.

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4 Responses to In praise of renters

  1. tokyo_lad says:

    Yes, but also consider the social effects of home ownership. My intuition is that higher levels of home ownership and less mobility should lead to more social capital. If social networks are important, and constant uprooting should also have other negative consequences which may be correlated with unemployment . I’d want to see this controlled for.

    Hmmm, a paper in there somewhere perhaps?

  2. AndrewN says:

    Tokyo lad is right in theory, but not necessarily in practice. In theory, yes, if you think you’re going to be in an area you are more likely to ‘invest’ in the community.

    But actually some of the factors Andrew talks about above (work a long way away) can lead to a fairly fractured life (kids schooled in one place, work in another and friends in a third) can mean you invest far less in the local community because “your community” isn’t located in the same place as your house.

    Looking at the stats doesn’t help because (certainly the ones I’ve looked at which are US-based) it depends who is leaving, who is arriving and who is staying (e.g. in poor areas, the more successful leave, sometimes areas with high churn are being gentrified and other times those with low turnover are the worst places – it’s just that no one can get out of there).

  3. Patrick says:

    The classic counter-example, TokyoLad, is Germany where very few own but social capital is apparently reasonably high – some preliminary research on that market is here.

    As discussed in this apposite piece from the Economist.

    Andrew, did you use to have html buttons or am I just getting old and delusional? You have an interest in hoping it is not the latter!

  4. Another problem with home ownership is that people tend to overextend themselves when they buy a home. It is tempting to buy a bigger house than is currently needed or affordable in the hopes that salary increases in the future will justify the decision. I know a lot of people making huge mortgage payments who wouldn’t think of spending the same amount on rent.

    The reasons people overextend themselves are complex. People want to buy a house they can live in for decades. If people are convinced house prices are going up, they want to benefit from the price increases. The result, in the short run, is that they pay a lot of interest to the bank and have to cut back spending in other areas.

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