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Please begin with an informative title:

To appreciate just how correct Paul Krugman was when he said, “Given the way US policy favours owning over renting,” writes Paul Krugman, 2008’s Nobel laureate in economics, “you can make a good case that America already has too many homeowners.” doesn't require a bunch of charts and graphs.  One need only recognize how differently the economies of high and low home ownership over the past decade performed.

Table 1 in Drivers of Homeownership Rates in Selected OECD Countries (OECD Working Papers No. 849 – 2011) lists the home ownership rate in selected countries in the early to mid-1990s and 2000 to 2004.  The general trend was more home ownership but the increases were mostly modest.  For example in the US it went from 66.2 to 68.7.  To provide some context, the US rate was 64% in 1960, the highest, and significantly so, among the listed countries at that time.  Those at the top (high home ownership) of the list by 1990 and increased by at least a point by 2000-2004:

Ireland: 79.2%
Spain:  77.8%
Belgium: 67.7%
UK: 67.5%
US: 66.2%
Italy: 64.2%

Notice anything interesting about that list?  


You must enter an Intro for your Diary Entry between 300 and 1150 characters long (that's approximately 50-175 words without any html or formatting markup).

In 2003, The Economist in House of Cards saw something disturbing:

...Since the mid-1990s, house prices in Australia, Britain, Ireland, the Netherlands, Spain and Sweden have all risen by more than 50% in real terms. American house prices are up a more modest 30%, but that is still the biggest real gain over any such period in recorded history. Commercial-property prices in some big cities have also been looking rather frothy.

Housing is just as prone to irrational exuberance as is the stockmarket. Property is increasingly viewed as an easy way to make money. People buy a home in the expectation that its price will continue to rise strongly over time. Such expectations lie at the heart of all bubbles. Given the boom in the property market over the past few years, at the very least house-buyers betting on further rapid house-price gains are likely to be disappointed. Worse, there is a risk that house prices will take such a tumble that they take whole economies with them.(emphasis added)
Four years earlier in 1999, Andrew J Oswald presented a correlation between high unemployment and high home ownership rates.  At the top of the list were:

Spain: 80% owner/18% unemployment
Ireland: 76% owner/10% unemployment
Italy: 68% owner/12% unemployment

In looking at trends, Oswald points out:

In the period from 1950 to 1960, most European nations had low owner-occupation rates and low unemployment rates. The United States then had relatively high owner-occupation of 60%. At that time -- this fact tends to be forgotten by young
economists -- the US had the highest unemployment rate in the industrialized world. ...
Unemployment rates have risen most quickly in the nations with the fastest growth in home ownership.
His observations are more interesting than his speculations as to causes.  For example, boom and bust housing construction cycles, so prevalent in the US, lead to short term rapid increases in home ownership and the subsequent high unemployment.  

Take another look at that list of high home ownership countries.  Now consider the low home ownership countries:

Switzerland: 33.1%
Germany: 36.3%
Netherlands: 47.5
Austria: 48.3
Denmark: 51.0%
France: 55.3%

Why was it that countries with the highest home ownership rates were most vulnerable to a housing price bubble?  Shouldn't they have been the least vulnerable?  And shouldn't the subsequent housing construction booms in the US, Spain, and Ireland have doused the fever?

Referring back to Krugman, when public policy favors home ownership, individuals respond accordingly because in the near term it appears to be in their personal best financial interest.  The societal trade-offs tend to get short shrift, and that in turn gets exacerbated by the owners choosing governments that further the favors to home owners.  To maximize profits, builders seek the cheapest land possible to respond to the demand and that results in poor land and infrastructure use public policies.  Removed from the vibrancy and variety of denser living spaces along with the increased travel time to work and shops, houses instead of community becomes the center of life.  Thus they become bigger – to store all the necessities infrequent shopping requires and space for entertainment – and better to maximize property value.  Until ...

Recall from Part I:

Modern systems, Perrow argues, are made up of thousands of parts, all of which interrelate in ways that are impossible to anticipate. Given that complexity, he says, it is almost inevitable that some combinations of minor failures will eventually amount to something catastrophic.
...human beings have a seemingly fundamental tendency to compensate for lower risks in one area by taking greater risks in another.
And from Part II:
In 1970.. The median house price to minimum wage ratio was 7:1....  [In 2000] That median house to minimum wage ratio was then 18:1.
What happened after 2000 when down payments, mortgage interest rates, and credit worthiness were reduced?  The system became more complex and people consumed the perceived reduction in risk; aggregate, national homeowner equity declined even before the crash.  Now there are too many houses in the wrong places, too run-down, too large, too expensive to heat and cool, too poorly constructed to last, etc.  

I once rode a train through parts of Philadelphia that was mile after mile of run-down row houses and what are labeled blighted neighborhoods.  It made me sad.  All the labor and natural resources that had gone into those houses had lasted so few years.  It would, however, be too intellectually sloppy to conclude that it was home ownership that planted the seeds for the decline in those neighborhood.  More heartbreaking are the stories of Pruitt-Igoe and Cabrini-Green because they housed people for even fewer years.  All examples of bad public policy.  Penn South in NYC is an example of better public policy and a coop model (good luck ever getting into one of those apartments).  But both may be weak responses to public policy that favors home ownership and that is a primary difference between the UK and Germany and the US, Ireland, and Spain.

So what keeps prices [rents]down, and why don't more Germans buy? Firstly, there is the supply of good quality rental accommodation. According to CB Richard Ellis, German housing associations and municipal authorities hold about 12% of stock, private housing companies 10%, and property funds about 1%; the rest is held by private investors.

Regional variations are enormous – in Berlin, the rental property share is an incredible 90% of the total residential market, which obviously keeps prices down; even in prosperous Hamburg the rental market is nearly 80%....

There are enough lifestyle and personal income level reasons why people may choose to purchase housing over renting.  However, when the real costs of buying over renting are charged, as seems to be the case in Germany, a majority prefer to rent and skip the ravages of property bubbles to mention but one negative of the home ownership fetish.

(In case you're interested -- the home ownership rate in Greece is over 75%.)      

Extended (Optional)

Originally posted to Marie on Fri Feb 17, 2012 at 05:09 PM PST.

Also republished by Community Spotlight.

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