Thursday, October 21, 2004

Home "ownership"

Lots of people (including David Skillens (?sp) of the NZ Institute on today's Wire, norightturn and my girlfriend) seem to think it's really important to encourage home ownership in NZ society.

I disagree rather. Firstly, when you buy a house on a mortgage, you don't really own it. Perhaps 90% belongs to a bank, and you're renting that bit. You own 10% (so kitchen ownership is a more apt term than home ownership). Of course, a bank is a friendlier landlord - they can't throw you out if you keep paying, and they won't complain if you paint the living room magenta.

The argument made by the NZI is that people who rent their house don't participate in property inflation (sorry, appreciation) and don't benefit from asset price bubbles (I mean value growth). To me this is an argument for a capital gains tax - why should I be taxed at 39% on money I work for and 0% on windfall earnings from owning a house?

The plan to subsidise housebuying seems to be going in the opposite direction - since the subsidies will have to be paid for, people will be taxed even more for working and at a negative rate for sitting in a house. They money won't even go to the poor deserving first time buyers - more money becoming available for houses will almost certainly just drive prices up and make existing property owners richer.

There are other arguments against forcing up the rate of home ownership:
  • Interest rates are higher than they need be in order to dampen house price inflation, reducing the competitive advantage of the productive sector.
  • People are less mobile, and consequently more likely to have problems finding jobs.

One argument Mr Skillens brought to bear was that home ownership made people more "involved" in society, and I think this is the crux. Modern centre-left parties (like Labour) wish to conscript people into the urban middle class (unlike the Nats, who want to boost the rural middle-class) and home ownership is their big "lever" in achieving this.

[ This reminds me of a spoof election slogan from the 80's - "Safeguard your hovel and pittance - don't vote Labour and lose them! ]

Have a good long weekend!


Asher said...

Of course, one could ask the question of what "owning" a house means in the first place.

What right do we really have to claim pieces of earth for ourselves, and then sell them at ridiculously inflated prices to our citizens?

Who says a piece of dirt in Wellington is worth more than a piece of dirt in Palmerston North? And what right do they have to say that?

The whole philosophy of property ownership is flawed to begin with...

Greyshade said...

In the long term owning your own home (debt free)minimises exposure to fluctuations in house prices (which can go either way). Owning a home with a high debt gearing leaves you potentially exposed to movements in interest rates or deflation but you normally aim to be in this position for only a relatively short time. If house prices go up so do rentals as landlords demand a return on their capital value (they may absorb short-term fluctuations). Home ownership also protects you from having to move for non-economic reasons (eg landlord decides to sell house).

The supply and demand for houses is not affected by the decision to buy rather than rent a house. If you rent a house then the landlord (ultimately) has to buy it and this contributes to demand in exactly the same way as if you had bought it yourself.

Because the "frictional" costs of buying and selling property are considerable (even if you avoid paying a Real Estate agent 4%) renting is a better short-term option if your future housing needs are uncertain. Once a family has settled down with secure employment it makes a lot more sense for them to buy their house.

I'm not sure what form government assistance for low-middle income home buyers will take. The old family benefit capitalisation scheme seems to be the inspiration but that requires a universal benefit and we don't have any at the moment.

Rich said...

I'd suggest that a lot of people, once they have some equity in their home, either trade up to a more expensive property, reducing their equity % again, or release the equity through remortgaging.

If people are allowed to capitalise their benefits, surely they run the risk of needing the income at a future date. What happens if, being strapped for cash, they don't insure the house and it burns down?

Moveover, I still don't see why it's equitable to subsidise home ownership, thus taking from earners and giving to the asset rich.

Simon Pound said...

thanks for the link re oil - I'm not entirely sure I agree entirely, as the trade is so large it really does remove huge amounts of redeemable coupons (money) from the states...... but anyway,

Good on you for listening to the wire, I reckon that Skillings is fascinating and long overdue and I really enjoy talking to him.
Also, he does not stipulate home ownership as the most important asset. He merely recognises it as the kind of asset kiwis seem most comfortable with.
Any significant asset, even education, is what they are aiming at ingraining (sp?) in the country's mindset.