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.

4 thoughts on “In praise of renters”

  1. I enjoyed reading your article. I found it very well written and factual. The home ownership and unemployment link was very interesting and the subsequent discussion on the contributing factors such as a resulting less flexible labour market. It would seem that bricks and mortar; while offering protection from the elements could also be a land anchor? 🙂

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  2. As someone who just pocketed the first-home buyers grant (via the purchaser of our apartment), I am a new covert to it’s existence 🙂

    It does strike me that you are talking about three issues here:
    1. (early) home ownership being a constraint on mobility and therefore bad
    2. stamp duties etc being a constraint on mobility and therefore bad
    3. first home buyer grants encouraging early home ownership and therefore being bad

    Given you can’t prevent 1 directly, would you prefer 2 or 3 to removed?  It strikes me that the mobility issue you refer to is not neccesarily age-contingent.  We would get better job-mtaching at almost every level if candidates could move easily (of course, attachments to family/schools etc might still constrain).

    How does Oswald’s work pan out for the US (where college seems to serve as a prompt to early mobility)?

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  3. In the high rental societies, whom owns the land?
    It brings an important issue of equity because rent is, well rent.
    It is what is sought by rent seekers.
    Riccardo named economic rents rent for a reason!
    If we expect real incomes to increase over the medium and long term (and I assume we do), then these rents are only going to increase with some radical land creation going on.
    How happy is a majority renter society seeing the minority owning the land cleaning up through the virtues of the whole society’s productivity growth and investment?
    The idea of the  “stakeholder” society of home ownershop, whilst often couched in alot of reverential and quasi religious talk does have the benefit of sharing these rents around.
    But at all these costs you outline.
    So does that leave government, in whom we also are supposed to share. It sound terrible, but to the best of my knowledge this is much like Hong kong. Laissez faire with socialised housing.
    But then…their flats are even uglier than Meritons!

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  4. I have read that part of the problem here is the primitive, cottage industry nature of the rental home ownership market. Most of the stock is owned by moderately affluent individuals who might have acquired one, or a few, rental properties as a way to invest their wealth. With negative gearing and the (currently futile) expectation of capital gains, now taxed at a concessional rate, rental properties are a proposition that is easy to understand. 

    In many continental European countries tenants can apparently get security of tenure to a degree that is impossible here. Presumably, many Swiss families spend their entire lives as tenants and the situation suits them well enough that they do not have an incentive to buy.

    Corporate management has emerged in retirement accommodation. Run Property, after a very rocky start, is trying in effect to bring some systemic order to the 6,500 real estate agencies that manage rental properties and the millions of properties that they manage.

    But will they manage to change the culture that you have to own your own home, if you are Australian and can afford to?

    Many years ago I remember talking to a bank manager about a customer he had (bank managers were all male in those days) who rented a townhouse, earned a six figure income and had applied for a short term loan to buy a car (a top-of-the-range Mercedes or something like that – it was before the days of the Maybach).

    “I turned him down,” said the manager. “He could have put a deposit down on a home with the cash that he had, yet he is renting. He is clearly not a stable person.”  The applicant had apparently immigrated recently from Germany.

    Whether Run and other companies that might follow on its heels manage to change the kind of deal available to long term renters (and their web site,  http://www.run.com.au////tenants/tenants.html gives no indication that that is their plan), remains to be seen.

    In the meantime, any Australian who owns their own home is a champion. Any Australian who doesn’t, sucks.

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