Huge problems

Our housing sector can cause huge problems for our economy, but also, traditionally, it leads us out of recession.

Residential investment, which is triggered of course by new housing starts, makes up a large chunk of the fluctuating part of the business cycle.

Changes in residential investment have a tremendous impact on the rates of gross domestic product growth. It always has played a big part in the recoveries from business contractions; many assumed the same would happen again, but things have not worked out this time around. Hopes that the housing market would be well on the road to recovery by now have been disappointed.

Here the bounce caused by a temporary tax credit and concessions for house renovations have long since faded.

All the latest data on home prices show that prices have continued to fall and are at their lowest level since prices started to decline a few years ago.

That has very important side effects. Home owners may not be able to move in search of jobs. Then too, changes in unemployment are excellent predictors of home owners falling behind with their mortgage payments.

House prices, more than almost any other asset, even stock markets, encourage speculation.

People do not routinely talk about the prices of, say, copper, but they like to talk about how much the prices climbed for their neighbour’s house – and by implication how much the value of their own house has risen.

Television advertisements reinforce that with programs of house renovations, and scenes at attractive houses as a backdrop to many family stories.

History shows that any spurt in house prices lures many to jump in the housing market; many have been brainwashed with the notion that house prices will never decline, and everyone needs a place to live. Soaring house prices usually are not a deterrent, but frequently lure many to jump in to get “a piece of the action.”

Yet the psychology of the consumer seems to be evolving over the last four years.

Most continue to have a dream of owning their house, but the situation is beginning to change.

It is becoming apparent that there are benefits nowadays in renting accommodation rather than buying a house whose price likely will be weak.

Recent analyses of relative returns from home ownership compared to renting reveals that it is starting to make economic sense for many to rent rather than to buy. Hitherto, political rhetoric has maintained that house ownership makes for more solid communities and that the children of those who own their own homes do better at school. All but forgotten is that in most parts of Europe people do not have their individual homes and society is quite stable.

The structural and economic shifts in the housing market suggest that home ownership rates probably have peaked.

In increasing numbers people are becoming renters, not house buyers.


Bruce Whitestone