According to English writer Virginia Woolf, a woman in Victorian England needed money and a room of her own in order to write. In the modern world, housing itself has become a work of fiction.
A house provides shelter and a dwelling place. But increasingly this simple consumption good has been converted into a financial asset or investment as well as instrument of policy.
Governments subsidise home ownership in different ways. They may provide tax benefits such as tax deductions for mortgage-interest payments or lower taxes on capital gains from the sale of a residence. Common concessions include lower property taxes or stamp duty of property transfers as well as direct assistance for the purchase of homes. It also includes housing finance on preferential terms. The subsidies mean that where they can, people buy multiple homes. The affluent own holiday homes which stay empty for much of the year, while less well-off are made to make do with sub-standard accommodation or, in the case of the poor, no homes at all. Houses become larger. Virginia Woolf would have recognised these MacMansions: “Those comfortably padded lunatic asylums which are known, euphemistically, as the stately homes of England.”
Over-investment in housing is economically inefficient. Unlike businesses, houses once constructed generate limited income, profits, employment or investment.
Excessive housing investment also creates an inflexible labour force, reducing the mobility of workers. The ability to follow employment opportunities is restricted by fluctuations in house prices, the lack of liquidity of the housing market and high transaction costs (buying and selling can cost 5-10 per cent of the value of the house). It also limits wage flexibility, as workers are constrained by their mortgage commitments.
The replacement of company or government-funded retirement with self-funded arrangements means that houses have become a means for wealth creation. As homeowners pay off their mortgages, their home becomes a major financial asset. But residential property produces no income even where they increase in value. Maintenance costs, utility bills and property taxes mean that houses require rather than provide cash.
Homeowners must generate income by borrowing against their home to finance consumption and eventually finance retirement. The strategy requires realising the home equity (the difference between the value of the house and the mortgage debt outstanding) by either borrowing or selling the property, moving into a smaller house or a rental. Treating houses as a financial instrument leads to an undiversified investment portfolio, with a large proportion of wealth concentrated in a single asset – the home, which does not produce income. Investors also buy houses and apartments with borrowed money to rent out. The income from property is rarely higher than that on other income-producing investments. Where borrowed money is used, the rent may not fully cover interest and other outgoings. There is speculative reliance on ever-increasing property prices to boost returns or repay the debt used to finance the property leaving a profit for the buyer.
Reliance on houses creates exposure to volatile house prices. As the global financial crisis illustrated, prices can be affected by a confluence of adverse events – economic cycles, the availability of credit and demographics where large cohorts may retire at the same time. Price fluctuations are exacerbated by the illiquidity of the asset. courtesy the independent