The benefits of homeownership subsidies fail to justify the costs

American spends billions of dollars each year in housing subsidies, but it has lower homeownership rates than many countries without subsidies of any kind.

Every homeowner wants to see the resale value of their home go up as rapidly as possible. Since more than half the country owns a house, political pressure mounts to prop up home prices and cause them to appreciate. The result is a plethora of subsidies designed ostensibly to make homeownership for accessible to lower and middle classes. In reality, these subsidies merely make houses more expensive.

The result of these subsidies and our ever-present desire for rapid home price appreciation is a great deal of house price volatility. Unfortunately, house prices can’t appreciate faster than the wages go up to support them. Any time prices are artificially pushed higher, they inevitably crash back down with horrendous consequences.

What’s worse is that this volatility is easily avoidable.

  1. If people accepted that house prices can only rise so fast, then perhaps they wouldn’t get carried away with kool aid intoxication and overborrow to buy real estate as an investment.
  2. If governments accepted that some people are better off renting, we wouldn’t get policies designed to make everyone a homeowner whether they can sustain it or not.
  3. If homebuilders, realtors, and bankers accepted that some people shouldn’t be given onerous debt loads to buy houses (and generate sales commissions), perhaps we wouldn’t have such powerful lobbying for policies that are the root of the volatility in our housing markets.

Have you ever noticed that when a government policy proves to be a dismal failure, the most common answer politicians come up with is to do even more of the same? How would you rate the success of the following ongoing government policies?

  • The war on drugs
  • The wars in Iraq, Syria, or Afganistan
  • Tax cuts for the rich
  • Welfare for the poor
  • Quantitative easing to boost the economy
  • Home mortgage interest deduction to boost homeownership

Policies to increase home ownership don’t improve the supply or distribution of housing. In fact, these policies often work against the goal of increased home ownership. The OECD’s Better Life Index shows that no relationship exists between a country’s home-ownership levels and its average housing satisfaction and quality.

Mexico, Nepal and Russia all have home-ownership rates of more than 80%, while the French, German and Japanese rates are 30-40 percentage points lower. The US and the UK rates sit between them at about 65 to 70 percent.

One of the main arguments in favor of high home ownership rates is that owners are supposed to have a vested interest in their communities whereas renters are hooligans who cause trouble. Germany and Japan certainly aren’t hotbeds of civil unrest.

The real issue, however, is the harm done by efforts in the UK to maintain and increase that rate, in particular, the distortion to savings behavior that mortgage subsidies and high loan-to-value ratios encourage. For many American households, their home equity is their primary financial asset. In other words, we incentivize middle-class households to leverage the bulk of their savings into a highly volatile, difficult to price asset, which is subject to disaster risk, and which – based on the economic fundamentals – should return at best the average rate of local wage and population growth.

House prices are tied to wage growth. Over the long term, prices can’t go any higher than buyers can push them. In the past, lenders abandoned prudent debt-to-income ratios and “innovated” with toxic mortgage products to push prices up faster than wage growth would allow. The result has been disastrous housing bubbles.

It’s better to own than “throw away money on rent”, isn’t it?

This has always been one of the silliest arguments realtors spout when trying to manipulate buyers. When people spend money each month for housing, they either throw the money away on rent, or they throw the money away on interest. When the cost of interest, even after the tax subsidy, exceeds the cost of renting — which it does on many California properties, unless that owner knows they will live in the same house for many years, they are fools.

All housing subsidies offer the promise of appreciation that would not otherwise occur. Once the middle class became over-invested in housing, government policy sought ways of distorting the market to justify this investment. Central bankers consistently lowered interest rates to juice house prices, and the government provides a plethora of subsidies to promote this malinvestment. Rather than causing trees to grow to the sky, it merely inflates unstable housing bubbles that crash with devastating effect on families and our banking system.

The costs of excessive home ownership, however, go even further. The promotion of such ownership is fundamentally regressive. It perpetuates inherited wealth and subsidies of middle-class children. The accumulation of housing wealth benefits those simply lucky enough to have had grandparents who were homeowners. Any policies to promote younger people “getting on the property ladder” will disproportionately benefit those fortunate children who have been given savings, have parental co-signers.

Someone will argue that having prudent parents or grandparents is an advantage we should encourage. Perhaps it is, but government policy doesn’t need to increase that advantage by inflating house prices beyond the reach of orphans, immigrants, or lower class workers who work and save and want to buy a house but can’t because the inheritor class has inflated house prices too much.

President Trump put a tax reform proposal to Congress that would curtail many of the sacred cow tax deductions and subsidies enjoyed by various special-interest groups. Perhaps it’s time to examine our obsession with housing because we don’t get much bang for our buck, and I fail to see how the benefits outweigh the costs.