Yves here. It’s intriguing that “our economic model is based too much on the housing market” is becoming a meme a mere six years after housing bubbles in most advanced economics were a major driver of the global financial crisis. Apparently, the fact that heroic efforts by the officialdom to restore the status quo ante via aggressive efforts to prop up the real estate prices (well, at least in the US, Spain and Ireland have gotten the Mellonite treatment instead) have instead produced zombie banks and a significantly-ZIRP-QE dependent housing recovery have finally led to some long overdue skepticism.
Of course, a big reason housing served as a driver of growth was not just the direct impact of homebuilding. Housing is the foundation of a consumer-oriented society. Bigger houses, after all, require owning more stuff to fill all that space. But the reason the housing-oriented economic model hasn’t been displaced is that numerous constituencies support it. There’s a large group of usual suspects: the “affordable housing” coalition (which ultimately produces less affordable housing by relying on financial subsidies, which raise asset prices), banks, realtors, homebuilders. But there’s also an even older political tradition of using housing as a vehicle for social engineering. Bush’s “ownership society” was that old wine in a new bottle. Right-wing and moderate political leaders felt homeownership was valuable because it would create stable communities and encourage conservative values. The fact that young people, who are finding it hard to secure stable, decently paid employment and buy houses, are polling decidedly left-wing on economic issues, says that the corprocrat’s neglect of the basic duty of capitalism, to generate employment, is going to bite them in the ass, although it may take another five to ten years for this generational shift to change political and economic priorities.
By Leith van Onselen, Chief Economist of Macro Investor, Australia’s independent investment newsletter covering trades, stocks, property and yield. You can follow him on Twitter at @leithvo. Cross posted from MacroBusiness
Over the past 24 hours, I have read a range of articles, both from Australian and abroad, arguing that the obsession with housing “investment” is sacrificing the economy’s potential by diverting too many scarce resources to what is, in the case of pre-existing housing at least, an unproductive investment.
John Carney, writing in Business Insider, encapsulates this view nicely, arguing that overinvestment in housing is thwarting innovation and technological advancement in the US, making it harder to grow living standards:
Let’s face it.
We are in something of an innovation rut…
What’s gone wrong? Much of the lack of innovation can probably be blamed on the malinvestment that resulted from the housing boom. It’s not just that too much funding got directed into housing—too much human capital got directed into housing and finance during the boom.
This is all too obvious on Wall Street these days. Most financial firms, stung by the tech bust and investor fears of tech companies, shrank their operations in this sector while pouring talent and funds into housing related sectors…
The result is that most financial firms lack the in-house expertise to invest in innovative business ventures on any meaningful scale…
What’s more, there was so much money to be made in derivatives and credit—largely arising from the underlying housing boom—that many of the smartest people got drawn into these areas rather than tech innovation. Basically, we got lots of questionable financial innovation instead of technological, medical, or environmental innovation…
In short, we can’t produce what we should be able to because we invested in the abilities to produce what we don’t need…
Is there a way out? Of course. The bursting of the housing bubble created a great opportunity to set the economy back on course. Unfortunately, our government engaged what amounted to Shock-and-Awe war against the liquidation of past errors, locking up even more capital in the errant bubble businesses.
It’s a view shared by Zachary Karabell, also from the US, who asks whether the economy has become addicted to housing in order to drive growth. From Reuters:
Housing is widely perceived as a key ingredient to a healthy economy, and so the revival in the housing market has been heralded as a positive step for an American system that has been sluggish at best. Similar trends in the United Kingdom and parts of the EU are greeted as positives as well.
But is it? Housing is a key aspect of economic activity in most countries, but that doesn’t mean that we should welcome a return to housing as a perceived pillar of national strength. And we should be very wary of any return to an ethos that sees either home ownership or housing prices as a barometer of individual and collective success. Those attitudes very nearly imploded the modern financial system, and they could imperil it again.
Homes are places where you live. They are not — and should never have been — investment vehicles. Yes, homes may gain in value and augment one’s net worth, but the reason to own a home is that it can be a cost-effective way to obtain a place to live. The minute they are seen as investments, that reality gets perverted, with dangerous consequences…
What was most damaging about the housing boom and bubble of the 1990s and 2000s was that millions of middle-class families bought into the notion that homes should be the repository of their net worth and future wealth. Decisions about buying shifted away from pure calculus of need and acceptable costs and instead were increasingly based on the likelihood (or not) that their homes would increase in value.
It’s an easy path from that belief to outright speculation. The idea that homes are a primary investment is not only what drives real estate bubbles but also drives real estate crashes.
And finally, our own Adam Creighton has written a post today in The Australian arguing that the recent explosion of property investment in Australia is “bonkers”, diverting resources away from more productive activities:
Ordinary people are being priced out of the so-called “great Australian dream” by cashed-up older generations buying for themselves and their children…
Buying a quaint 19th-century terrace in Sydney or Melbourne might impress friends, but it doesn’t add to the nation’s productivity capacity one iota. Individuals invest by studying at university, or investing in a growing business; companies might buy equipment or build factories that enhance their productive capacity and future profitability.
Beyond any capital appreciation, the only tangible return from buying an established dwelling is the right not to have to pay rent – nothing more or less. And rents typically grow in keeping with average household income; they bear no relationship with the skill or effort of the owner as business profits do…
Australians developed an unhealthy obsession with housing in the 1980s which they are yet to shake. In the long run we can’t become more prosperous by buying each other’s houses at ever higher prices, however wealthy individuals might “feel”.
I obviously sympathise strongly with these views. A quick look at the Australian macro data suggests that the Australian economy has become over-invested in housing, with the total value of the housing stock now roughly three times the size of the economy, versus only two times the size of the economy in the mid-1990s and around 1.5 times the economy in the 1960s….
Like Frankenstein’s monster, it would appear that the financial sector, which once acted merely as an enabler of the productive economy, is now pulling its master’s strings, and arguably crowding-out more productive sectors in the process.
As noted yesterday, the likely decline in commodity prices and the terms-of-trade over the decade ahead is set to weigh heavily on Australian income growth, requiring a significant lift in productivity if Australia’s living standards are to continue growing at a pace to which we have become accustomed.
Diverting more of the nation’s financial capital and resources into housing, particularly pre-existing homes, is the wrong recipe to achieve such growth in productivity and living standards.