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My Home is My…

Pinchas-LandauA fascinating aspect of the debate that erupted around the latest proposals to bring down housing prices in Israel was the underlying assumption – made explicit by some interviewees in some of the programs and articles – that people, especially young couples, have a right to own their own home.

Even in the context of the rights-oriented modern era, this is remarkable, while the corollary – which is that governments have an obligation to assist people (and especially young couples) to realise their inherent right to own a home – is nothing less than a recipe for national bankruptcy. In the unlikely event of a country surviving the consequences of its citizens’ supposed right to have rapid access to ALL the available medical technology, services and products that modern science can generate, it will surely be doomed by any attempt to facilitate the right to own your own home.

The United States is as good an example as you will get of a country that has inflicted enormous damage on its economy in the effort to enable people to own their own homes. The rationale for this effort is that home-ownership is “part of the American dream”, and therefore it behooves every red-blooded American to aspire to that status – and it is incumbent on every American politician to actively assist in the fulfilling of those aspirations.

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This explains why successive administrations, of both parties, developed and expanded policies aimed at increasing the level of homeownership in the USA. One of the more ludicrous and pathetic elements of the ‘debate’ over the housing bust and crash that began in 2006 was the effort by partisans of each party to demonstrate that it was the other party’s presidents whose policies had caused the crash. In reality, even the most cursory review of American housing policy (the very phrase reveals the depth of government involvement in this area) suffices to show that this was a totally bi-partisan effort, which culminated in the bankruptcy and subsequent bailout and nationalization – by the “conservative” Republican, George W. Bush — of FNMA (“Fannie Mae”) and FHMC (“Freddie Mac), the financial entities through which government financial aid was channeled to would be homeowners.

The policies aimed at assisting people – especially lower-income and young families – to buy their own homes were very successful. The rate of home ownership in the US, which had fallen under the impact of the severe recession in the early eighties and had stabilized around 64% between 1985-1994, rose steadily in the following decade, peaking at around 69.5% in 2003. But a decade further on – i.e. in 2013 – it had fallen back to 65%. This fall began before the housing bubble burst, continued through the slump and never stopped. At no point in the supposed recovery of the last four years did the homeownership rate even manage so much as a ‘dead-cat bounce’.

The relentless downtrend reflects the ultimate failure of the efforts to promote home-ownership – but it says nothing about what caused this failure or, for that matter, why the last decade has been so remorselessly negative to home-ownership, come boom or bust.

The main answer lies in the mega-phenomenon popularly known as ‘the decline/ death of the middle-class’. Except in the wildest period of the housing boom in the US, the mortgage business was based on the ability of the borrower to repay his loan, and the primary consideration was whether the borrowing family had one or two breadwinners and how high their incomes were. In other words, home-ownership – even in the Anglo-Saxon countries, where it took on quasi-religious status in the second half of the twentieth century – is inextricably linked to having a steady job and income and to meeting your obligations, which are the pillars of middle-class life and values. As the American labor market has crumbled (a topic frequently discussed in this column), and with it the middle-class, so has the level of home-ownership fallen.

This conclusion explains why there is no recovery in the US residential housing market, why mortgage applications have collapsed since the first signs of a reversal in interest rates last year, and why the reform of Fannie and Freddie recently passed by Congress is meaningless. It’s not that there is no demand, rather that the demand cannot be translated into actual purchases without mortgages, and mortgages cannot be granted unless the borrowers have an income stream with which to repay.

It is also immediately clear why the housing market in Canada is so strong: just compare the rate of participation in the Canadian labor market, which is high and stable, with the American one, which is rapidly declining. Similarly, once you know that the Israeli participation rate – the key metric for measuring the health of a country’s labor market – is rising and that wages are rising, you know that the Israeli housing market will be vibrant.

Add in a prolonged period of under-building, absurdly low interest rates, over-eager lenders and a national culture that — for reasons that have little to do with economics and finance, but probably a lot to do with history, psychology and other fields – regards home ownership as essential, and you know that Israel is having a housing boom. When you hear people saying that owning a home is their right, you also know that it’s nearly over.



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